You run a small, boutique investment advisory and financial planning business providingfinancial services to retail investors. The company receives advisory and investment returncommission fees for providing investment advice and designing investment strategies andportfolio for individual clients. You have recently been approached by a new client who islooking to invest $1,000,000 outside of their employment-based superannuation account toprovide an additional nest-egg and funding source as they transition towards retirement. Theclient has provided the following brief and guidelines associated with their investmentrequirements:• They have a reasonable level of risk tolerance, and are willing for their funds to be investedin equity securities, listed investment companies (LICs) or exchange-traded funds (ETFs),equity market option securities or futures contracts, and cash. They are looking for thedevelopment of an investment portfolio with a capital growth perspective, and are lessconcerned about ongoing income or the tax-effectiveness of the portfolio.• Given the current sharemarket uncertainty following the referendum decision in the UK toleave the European Union (EU), they would only like physical share investments in thehighest-quality securities represented by the 100 largest listed companies on the AustralianSecurities Exchange (outlined in the provided spreadsheet file). At least 40% of the totalinvestment funds are to be invested in physical equity securities and, to ensure a prudentlevel of diversification, no more than 10% of the total funds are to be invested in any onecompany. They would also like a minimum of 50% of the Australian direct shareinvestment component (excluding LIC and ETP investments) to be hedged using marketfutures or option securities to provide some protection again adverse market movements.• They are comfortable with diversified investment in other segments of the Australiansharemarket or in international markets through holdings in LICs or ETFs (list of preferredLICs and ETFs is provided in the attached spreadsheet file).• They have indicated that short-selling of securities is also permissible, although sufficientreserves are required to be held in a cash management account to meet re-purchasingrequirements.• They have also approved the use of equity index futures contracts and option securities forspeculating or hedging purposes. Current information about these securities is as follows:o The closing price of the December 2016 SPI 200 Futures Contract was 5,336 on13/07/16 (Contract value represents A$25 × SPI 200 value). Each contract willrequire creation of a $10,000 settlement account to meet margin movements.o The preferred equity market call option is the SPI 200 (A$25 × SPI 200 value)expiring in December 2016 with an exercise price of 4,950. The closing price ofthis call option was $492.00 on 13/07/16.o The preferred equity market put option is the SPI 200 (A$25 × SPI 200 value)expiring in December 2016 with an exercise price of 4,950. The closing price ofthis call option was $106.00 on 13/07/16• They have indicated that a maximum of 20% of the total funds can be maintained in a cashmanagement trust as a liquid and secure investment. The preferred cash investment is theANZ Cash Advantage Fund which is currently providing a return of 2.15% per annum.The performance of the recommended investment portfolio proposed will be evaluated relativeto the performance of the S&P/ASX 200 index, which had a closing value of 5,388.50 on13/07/16.Required:This case study requires the completion of the following tasks:• An explanation of an underlying investment philosophy and strategy for thedevelopment of the portfolio, which is consistent with the indicated requirements ofthe client. Explanation and justification for this strategy, individually or relative toalternatives, should be provided.• A description, in table or similar format, of the recommended portfolio components,indicating the selected assets / securities and the magnitudes of investment in each.• A brief explanation of how each of the recommended investment components alignswith the overall investment strategy.
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