Question

Case study: the right portfolio

After working as a securities broker for 20 years, Simon Eckstein decided to lead a less hectic life. He set up an investment consulting firm 2 years ago and has rapidly built his reputation as the best consultant on securities investment in the area. Today, 5 clients called on Simon for his advice on their investment plans. The first is a 35-year-old divorced woman who has 2 teenage sons and wants to invest $50,000. the second and the third are a couple, both having retired and planning to invest $60,000. The fourth is an university freshman, a 19-year-old boy. He lost his parents in a car accident last year and received $2,000,000 from the insurance company. He plans to use some of the compensation to pull himself through the university and the rest to invest. The last is a single woman, 27 years old, working as an accountant for a local department store with an annual salary of 26,000. Her planned investment is $40,000.

(1) What do you think should be appropriate investment goals for the five clients If you were Simon?

(2) What kind of portfolio investment would you suggest for each of them?

Answer 1

Client 1 - 35-year-old divorced woman with 2 teenage sons and wants to invest $50,000.

(1) Her goal should be to get a stable dividend every month with a fixed lump sum money at the end of the investment horizon for the 2 sons education

(2) She has a low-risk profile and must invest in top-rated corporate bonds and blue-chips mutual funds. A very small proportion of her portfolio must be in high growth companies.

Client 2 and 3 - A couple, both having retired and planning to invest $60,000.
(1) The goal of both these couples should be to get a fixed amount per month with certainty

(2) These investors have an extremely low risk-return profile and hence must invest in ultra-safe assets such as T-bills and Treasury bonds with the option of monthly dividend option.

Client 4 - University freshman, a 19-year-old boy.  He lost his parents in a car accident last year and received $2,000,000 from the insurance company.

(1) His investment goal should get yearly amounts to cover for his college and living expenses and getting a bullet payment at his retirement or after a long-time horizon

(2) A part of his portfolio should consist of extremely safe assets. This would be used to make up for his living expenses and college expenses. This proportion of assets must be invested in T-bills and treasury bonds. Another major part of his portfolio should be invested for a longer time period and high growth assets. Since the time-frame is large, his portfolio should consist of high-quality small-capitalization stocks with sufficiently high growth returns spread over several years.

Client 5

Single woman, 27 years old, working as an accountant for a local department store with an annual salary of 26,000. Her planned investment is $40,000.

(1) Her goal should be to save up mainly for her retirement fund.

(2) As an employed personnel and large investment horizon, she has a high-risk high-return investor profile. A part of her portfolio must be invested in high growth stocks, with a large investing horizon. Another part should be invested in high-yield, highly rate corporate bonds. A proportion should be in high yield bonds with a long investment horizon. A small proportion should be invested in highly safe, Treasury bonds assuring fixed returns and low risk.