Question

You have $100,000 and want to invest in stock market. Explain the composition of your potential portfolio.

Answer 1

For a well balanced and diversified portfolio, we need to assess the investor’s appetite for risk. Also, we need to have information on investment term whether intended for long or short. Investor who is risk averse may build portfolio which consists more of Fixed Income Securities, and less of Equities. Investor who wanted to maintain an aggressively balanced portfolio may opt for more portion of Equities and moderate portion of bonds, with a little cash. Diversification can be implemented by picking stocks from different industrial background and companies. Asset allocation might need to be changed often so as to synchronize with the market volatility. Positions holding should be rebalanced based on its weightages in the portfolio.

For an example, if we have a client whose an investor with a risk averse appetite, we’ll choose 75% of Fixed Securities and 20% of Equities, remining 5% of cash in hand. That means if the portfolio’s value is 1,00,000$; the fixed securities mount to 75,000, Equities about 20,000, and cash in hand about 5000. The weights can be changed in order to rebalance strategically. If the investor is moderate on his risk, he may as well choose 50% of Equities and 35% of Fixed bonds, 15% of cash in hand. When converted in an amount divided in value, equities will weight around 50,000, fixed bonds around 35,000, cash in hand for 15000.