QUESTION THREE PORTFOLIO MANAGEMENT According to the theory

QUESTION THREE: PORTFOLIO MANAGEMENT According to the theory of Portfolio Management, individuals or investors could be said to pass through four lifecycle stages and individual preferences. These stages could be viewed as being the basic factors affecting individual investor return requirement & risk tolerance. Closely related to the age of investor, is the decision on Asset Allocation. As individuals approach retirement, they become more risk-averse. Required a) Based on the above paragraph, i. Outline 3 factors that are vital in the asset allocation decision (3 marks)

Solution

Ans : a) 3 Vital factors as per the paragraph given for asset allocation are :

1) Age of individual, 2) Risk appetite (Risk averse or risk taker) 3) Nearness to the goal

b) Attribution analysis is the performance evaluation tool of the portfolio, In this analysis the performance is being compared to the benchmark portfolio for evaluating the portfolio holder capability.

Major factors when reviewing the portfolio using attribution analysis are:

1) investment policy, 2) asset allocation, 3) security selection and 4) activity..

c) Sidon Consolidated net return:. R = 50%*12 +35%*9+15%*6 = 10.05

Return of Tyre limited portfolio , r = 70%*10 +20%*13+ 10%*5 = 9.605

Excess return of the portfolio compare to benchmark = 9.605 - 10.05 = -0.445% i,e. excessive return, which is unfavorble as it is negative means the return of becnhmark is more than the Tyre limitd portfolio.

d) To improve the performance of the portfolio, asset allocation is required in a better manner, i.e. return on bonds are higher , hence more weightage to be given to binds rather than equity by the Tyre limited