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Securities Analysis and Portfolio Management (assignment) - Essay Example

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Securities Analysis and Portfolio Management (assignment)

Simon’s stockbroker is Louis who does not believe in making unnecessary changes to portfolios. Apart from some rebalancing after the initial impact of the credit crisis to make each of the ten holdings approximately equal in value at the time the portfolio has been largely unchanged for several years. Louis is no longer working as a stock broker and Simon is now using the services of Cheryl who has strong views about Simon’s portfolio. Cheryl, a graduate in finance from York University, believes that markets are essentially efficient and admires the work of Harry Markowitz and Fama and French. She believes that the important thing is to have a good portfolio rather than good individual investments. Cheryl tells Simon that she doesn’t feel that he even has the best companies now even if they had been when the portfolio had been set up. Cheryl goes on to say that that a good portfolio needs to include exposure to overseas companies and smaller companies thus reducing the “beta” and improving the “alpha” of the portfolio. Cheryl also argued that it is vital to watch the “momentum” and have stop-losses on all the holdings in order to protect against primary downside movements. Simon is very concerned about his share holdings after talking to Cheryl and has approached you for advice. You ascertain that Simon, who doesn’t work, is 65 years old and is receiving a more than adequate income from his existing portfolio. Simon rents a flat in a seaside resort and does not wish to buy property. Simon is not willing to take on any additional risk. In addition to the shares discussed above Simon has ?14,000 in a bank account and ?300,000 in medium dated conventional gilts. Simon has two children from his short lived marriage to Susan who both have well paid jobs. Simon does not wish to transfer assets to his children as he would prefer to support any future grandchildren he has through their education. Simon’s ten equity holdings are: Company PE Ratio Dividend Yield Dividend Cover Equity Market Capitalisation (?m) BAE Systems 7.9 4.96% 2.5 11,003 BP 7.2 8.84% 1.6 77,353 British American Tobacco 15.4 4.2% 1.5 47,264 BT Group 7.6 4.89% 2.7 10,956 Diageo 14.8 3.47% 1.9 66,234 GlaxoSmithKline 10.5 4.78% 2.0 66,234 HSBC 29.9 3.34% 1.0 116,479 Marks and Spencer 10.9 4.16% 2.2 5,705 Rolls Royce 14.7 2.56% 2.6 10,847 Unilever 16.1 2.31% 3.2 23,281 Required: (a) With relevant statistics, discuss the strengths and weaknesses of Simon’s existing portfolio above (make reference to eps/dps growth; betas; price performance; and sector spread of the ten shareholdings). (35 marks) Simon’s stock portfolio has been constructed according to the established views of modern portfolio theory, which seeks “alpha” by selecting stock holdings in companies that will outperform the return of the general stock indices or interest rates over time. Modern portfolio theory is based in the tenets of risk management, which analyze security investments according to “beta” or the volatility of stock pricing due to company specific business activities, market factors, macroeconomic changes, natural disasters, wars, etc. Investors have different expectations, personal, and professional motivations in building their investments and with this also comes varying appetites or tolerances for risk. Modern portfolio theory was developed largely before ETF vehicles existed to track index performance through large, distributed ...Show more


In September 2010 Simon reviewed his equity portfolio, which was then valued at 4 million. Simon had been much impressed by a biography of Warren Buffett and had take to heart the principle that “Buying quality is always the cheapest in the long run.” …
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Securities Analysis and Portfolio Management (assignment) essay example
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