risk management multi-part question and need the explanation and answer to help me learn. ABC Capital Management is one of the most prestigious asset management companies in the country. I
risk management multi-part question and need the explanation and answer to help me learn.
ABC Capital Management is one of the most prestigious asset management companies in the country. It has been managing the wealth of America for over 100 years. It utilizes various forms of fundamental, technical, and quantitative analyses in the design and implementation of its several investment strategies and portfolios. Today, ABC Capital is a global investment management firm that continues to focus on rigorous research and the development of innovative, practical investment strategies. Because of this, ABC Capital is able to achieve the goals of its clients: individuals, pension funds, endowment funds, banks, insurance companies, foundations, and sovereign wealth funds.
You work as a junior portfolio manager with ABC Capital. ABC has assigned you an existing client of the firm. ABC provides you the client’s existing portfolio and the previous year’s performance. In the process of reviewing with your client, you find out that the client is very nervous about market risk. The client is more concerned with preserving his wealth than growing it, but the client needs a 3% income stream and a total return of at least 5%. In addition to this, the client indicates that he wants to keep his portfolio as eco-friendly as possible. Assume broad market returns are 8% annually and use the current 1-year treasury yield.
You will:
Create a new Investor Policy Statement (IPS) based on the new information you received from the client.
Create a presentation with two parts:
Evaluation of previous year’s performance, indicating the description of allocation, performance, risk/return metrics including alpha, beta, Sharpe ratio, Treynor ratio, and standard deviation.
Outline of your recommendation for an allocation change indicating the description of allocation, expected performance, risk/return metrics including alpha, beta, Sharpe ratio, Treynor ratio, and standard deviation. Include the metrics for the portfolio as a whole.
Support your analysis and recommendation by completing all required calculations in the spreadsheet linked below.
Requirements: Adequate
Client Portfolio Review
Nicole Wert
Rasmussen University
FIN4372CBE: Investment Portfolio Management
Professor: Latricia Roundtree
Purpose of the Investment Policy Statement
ABC Capital Management has been operating as an asset management company in America for over 100 years. I was provided with the previous years performance. During my review, I found that the client is actually very nervous when it comes to market risk. The clients goal is to preserve his wealth instead of growing it.
Objectives
The principal objective for this client is to produce returns that are adequate enough to meet the clients wanted financial support over the long-term. This means maintaining a 3% steam of income, a minimum of 5% return and sufficient liquidity. It is the clients wishes that these items are maintained while also:
Minimize Risk
Ensure the portfolio is eco-friendly
Staying within an satisfactory volatility
Maintain the desired liquidity
Risk
There is a risk anytime you are investing. A successful portfolio is able to address risks and find a way to balance satisfactory returns with liquidity and volatility. There are several risks that the client would especially like to consider.
Surplus Volatility – Resist the urge to sell based solely on recent market movements.?Selling stocks when markets drop can make temporary losses permanent. (Schwab, 2022)
Shortfall – A shortfall is an amount by which a financial obligation or liability exceeds the required amount of cash that is available. A shortfall can be temporary, arising out of a unique set of circumstances, or it can be persistent, in which case it may indicate poor financial management practices. (Hayes, 2022)
Illiquid Investments – On the other hand, illiquid investments are ones that require some extra effort to exchange. Often where the fair market price is not easily determined or a combination of both. (Kovoor, 2023)
Time Horizon
Investment time horizon refers to?the amount of time an investment will be held before the money is needed back. Time horizons drive the type of investment portfolio you assemble. The longer a time horizon, the riskier a portfolio will tend to be. (Wealth, 2022) With the clients interest in mind the time horizon would be medium-term as to allow for some growth without being too expoesd to risk.
Risk Tolerance
ABC Capital Management recognizes that the client was not happy with the amount of risk the previous years portfolio. They would like to maintain their wealth rather than grow. A shorter time horizon will allow for this to happen. Medium-term goals are those between five and ten years away. With this much time, some exposure to both stocks and bonds will allow the portfolio to grow without being overexposed to risk. (Wealth, 2022)
Asset Allocation
The clients assets will be categorized into three groups. The below chart will discuss the targets and ranges for these.
Name: _____________________________________________Date: _____________________
Signature: __________________________________________
Name: _____________________________________________Date: _____________________
Signature: __________________________________________
References
Hayes, A. (2022, December 13). Shortfall: Definition, what happens, how it’s corrected and types. Investopedia. Retrieved March 13, 2023, from https://www.investopedia.com/terms/s/shortfall.asp#:~:text=What%20Is%20a%20Shortfall%3F,indicate%20poor%20financial%20management%20practices.
Kovoor, S. (2023, February 3). What are illiquid investments? Smartland. Retrieved March 13, 2023, from https://smartland.com/resources/what-are-illiquid-investments/
Schwab. (2022, March 17). 7 things you can do during a volatile stock market. Schwab Brokerage. Retrieved March 13, 2023, from https://www.schwab.com/learn/story/7-things-you-can-do-during-volatile-stock-market
Wealth, M. (2022). Why investment time horizon is important. Marietta Wealth. Retrieved March 13, 2023, from https://www.mariettawealth.com/why-investment-time-horizon-is-important/#:~:text=Investment%20time%20horizon%20refers%20to,portfolio%20will%20tend%20to%20be.
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