Investment Strategy


Step 5: Pick specific securities
-Select the specific securities (bonds, equities or other) that you will recommend the client purchase with his or her funds.

-Can you purchase specific bonds that mature at the time that funds are required? Explain to the client what this does to the risk of the portfolio.

-Outline the criteria that you have used to select the securities. This should include an assessment of things such as the P/E ratio, the shape of the yield curve and current price of risk in the markets.

-The securities selection should be consistent with the asset allocation decided in Step 3. Any changes in the asset allocation that have been considered should lead to some change in the composition of the securities held. If you have outlined some potential for changes in the asset allocation, you may want to also recommend changes in specific securities that would accompany these adjustments.

-You may want to look at funds. Which funds will you choose? How will you make the selection? What are the costs that you will have to pay to invest in these funds? What are the costs and benefits of using funds rather than your own judgment?

-write an executive summary (300 words) with respect to both documents attached and step 5.


Davie young is a client who is unmarried Engineer who is 27 years old. Davie young has worked in an Automotive Engineering firm for almost 3 years where he earns TTD $450,000 annually. Davie lives in high-end area of town with his monthly rent being $14,000.00. Luckily for Davie his parents gifted him a new Mercedes-Benz worth around $650,000.00 for his golden birth just a few months back. Davie is an avid show man, often racking up monthly credit card bills over $20,000.00 per month on travel with friends and partying to impress women. Presently Davie’s has an outstanding balance of $40,000.00 on his credit card to which the charges a minimum of 1.324% per month. Davie’s major goals are to purchase a townhouse in the area he lives in for around $3,800,000.00 and to also purchase two other smaller apartments to rent for increased income for around $1,500,000.00 each. He hopes to accomplish this within the next years, with the expectation of settling down and having a family.

Davie’s assets amount to $1,100,000 while his obligations amount to $208,000 at the moment. He has a future budget of $6,800,000 which he plans to buy himself a house and invest in rental houses of which it would be a good idea as the amount he pays on rent will be cut of even though he will have to spend a lot but he will be saving to the future.

The financial needs of Davie are purchasing a house where he will live in and purchasing rental houses so that he can increase his income. It will be difficult for Davie to obtain his financial needs unless he saves for some years or pay with instalments as his annual salary is $450,000 and the budget of his financial wants is $6,800,000. Davie can find an option of raising the funds by involving his friends and family so that he can pay them back in future when he has made profits. Davie has an option of debt financing so as to raise the capital he wants where he can borrow loans from the lenders and repay back in terms of instalments and interest this can bring some difficulty to him as most of his cash he will be using to pay the debt but in the future, he will be able to enjoy the profits. He can also seek equity financing so that he can meet his budget and pay back the investors with equity in the future. Grants can also be helpful to Davie where he can get it from the government or from the donors. (Sharan, 2009, Pg.333).The financial assets of Davie are his $450,000 salary and his motor vehicle worth $650,000.

Davies statement of financial position
Revenue $450,000
motor vehicle $650,000
total $1,100,000
Rent $168,000
creditors $40,000
assets-liabilities $892,000


Hence Davie has an ability of saving as his liabilities not more than his assets and he works harder he can be able to purchase the houses he wanted so that he can have constant cash flow in the future.

Calculating the future values

Credit=$40,000(1+0.013) ^12=$46,706


Rent at the end of each year=$14,000*12=$168,000

Credit bill at the end of the year=$20,000*12=$240,000

Davie need $6,800,000 so as to achieve his future goals and in case of inflation the budget will be affected as it can easily increase as there are different pressures changing every day. When the factors are, little money will move around more quickly and the price of the houses will rise. House prices rise by the available rate of inflation times the cost of the house hence the price of the houses can easily be doubled by inflation and it would be much better if Davie takes a fixed rate mortgage as he will pay less in case of inflation. Davie might get less income from the rentals than he expected as demand and supply of the houses influences its price, where oversupply of housing will lead to fall of the home prices hence leading to less profit in the future.

An appropriate inflation rate is chosen by considering the consumer price index, producer price index and international trade index to analyse how the interest rates are fluctuating. Also wage price index is considered so as to know the amount people earn within that environment so as to set a favourable rent amount. Residential property price index and selected living cost index should also be considered in so as to choose the appropriate inflation rate. The rent to be set by Davie in future will depend on the gross domestic product of the people, government consumption, private capital formation, household consumption, interest rate and inflation rate.

Davie can apply different financial alternatives to raise capital so as to attain his goal. Some of these alternatives are debt financing where he can borrow loan from financial institutions, contribution from friends and family where friends can give him cash or he can inherit property from family and grants from donors or the government. Marketing strategy where he should market his houses in future and also have an attracting view so that they can easily attract the customers and to uphold a competitive advantage. The strengths of the financial arrangement are that he will have the ability to own his houses on time while its weakness is that even though he will be making profits he will also have a lot of debt to be paying. The marketing strategy strength is that he will have an ability to expand his business on time because if he markets his houses nicely, it will attract many customers hence enough money to maintain the houses and get enough income. Its weakness is that marketing is costly and he might end up using most of his profits in marketing than saving (McDonald, 2013, Pg 230).

There is a currency mismatch because the exchange rate is rarely constant as it keeps changing from time to time. The foreign currency requirement is that every transaction must be reported to the government hence Davie’s rental transactions must be affected by the exchange rate as they must be reported (Bindon, 1983, Pg.56). The foreign currency assets will be the interest rates that Davie will pay if he took a loan from the financial institutions or what he might incur while exchanging currencies. The risk that one will encounter while exchanging foreign currency is transaction exposure if he has payables and receivables whose values are directly affected by the exchange rates. Economic exposure this occurs when the market value is affected by the exchange rate and this affects the company’s position compared to its competitors. Translation exposure which will change the overall earnings of the firm as the financial statements will be reported as per the current exchange rate. Contingent exposure when one is awaiting a contract to be approved the currency will be fluctuating as per the exchange rate (0’Brein, 1994, Pg.25). One can overcome the exchange rate risks by hedging. Hedging is the use of futures, forwards, options and swaps so that one can know the right time to do the exchange rate and what amount is good to be exchanged at a certain time. The cost of hedging is that it will help minimise the exchange rate risk but the returns to the investor will be less (koziol, 1990, Pg.62).

Davie is a risk taker as he is willing to invest more than he earns so as to achieve his goal. Davie is willing to take a risk and invest $6,800,000 while he earns less than this in a year. Davie is planning to own his home first before the rentals which will lead to difficulties as he only depends on his salary for income and he has no investment. Davie has an option of starting by buying one rental house which is $1,500,000 so that he can invest in it so as to generate more income for him to buy a second rental house at the same price. After him owning the two rentals as he wanted he will be having cash inflows which he can easily save or invest for him to buy his own home. This will be a better way for him to start off as he will easily do anything when he has cash inflows. The rent of the houses will be affected by the economic exposure and the transaction exposure. If he takes a loan as capital it will also be affected by the interest rate risk and the exchange rate risks. If Davie decides to buy his own house first it will be the worst-case scenario as he will be using his income because he has no cash inflows hence costs will be high while the revenue is low. If he decides to start by buying the rental houses that will be good of him as he will have cash flows which will enable him to buy his own house in the future hence best case scenario as costs will be lower while the revenue is higher.


BINDON, K. R. (1983, Pg.56). Inventories and foreign currency translation requirements. Ann Arbor, Mich, UMI Research Press.

Koziol, Joseph D. (1990, pg. 62) Hedging: Principles, Practices, and Strategies for the Financial Markets. New York: Wiley.

MCDONALD, M., WARD, K., & SMITH, B. D. (2013, Pg.230). Marketing due diligence: reconnecting strategy to share price. Hoboken, N.J., Wiley.

O’BRIEN, T. J. (1994, Pg.25). Corporate measurement of economic exposure to foreign exchange risk. Cambridge, MA, Blackwell Publishers.

SHARAN, V. (2009, pg. 333). Fundamentals of financial management. Delhi, Pearson Education / Dorling Kindersley (India).


The goal of implementing asset allocation is to balance risk ad rewards through apportioning of the assets that comprise the portfolio in line with the to the goal of the person as well as his investment horizon and risk tolerance. There are three asset classes that an individual chose from when allocating the sources: fixed income, equities and cash and cash equivalents. According to Elton and Gruber (2011) it is recommended that the stocks would be purchased and held for five or more years. Cash and cash equivalent (such as money markets) are appropriate for the goals that are not more than one year while the bonds come in between the two.

  1. Davie’s Fund Allocation

Davie’s primary goals are to buy townhouse and smaller apartments to rent for about $3,800,00 and $1,500,000 respectively. Given his current earnings, Davie will require to save and invest for some years to achieve this goal it would be recommendable for Davie to invest his money in Stock, bond, and cash. This asset allocation will help to ensure that his has sufficient money to run his daily activities, earns the highest return in the market while minimizing the level of risks that he takes in the market.

  1. Cash Allocation

Davie should allocate 45% of his money in money and money markets. Davie’s monthly rent is $14,000.00. 45% annual saving in cash would ensure that he has sufficient cash that will help to cater for his monthly bills, daily expenses, and his lavish life. However, he will be required to minimize his monthly spending to accomplish these goals. For example, currently, Davie likes partying and travelling with friends. This can pressurize his current financial status and make it impossible to meet the set goals. The cash allocated should be held in the interest-bearing deposit account.

Holding cash reduces the risk that Davie will take in other markets such as the stock market. This is because here is no risk that the money may be lost when held in the account. On the other hand, the interest offered on the deposit accounts is small compared to the yields from the other money market. The objective of holding the money in the deposit account would be to facilitate Davie liquidity. Usually, cash and cash equivalent are the most liquid assets that the investor can hold. This is because money can be exchanged as easily as possible for anything that Davie would like to buy. However, holding much cash is counterproductive to the long-term savings goals as of will reduce the amount that is available for the future investment and can encourage a high level of spending, especially given that Davie is a spendthrift (Moraif, 2015).

It would be recommendable that Divas hold his cash in money market account. This is the kind of deposit account which pays interest for the one held at the similar rate to the money market. On addition, money market account does not require any notice for the person to make a withdrawal and when the notice is required it is usually a very short notice. In the USA, this is similar checking accounts given that they provide an offer that has privileges of check-writing and instant access. These accounts are also subject to various regulations which regulate the saving accounts such as the monthly limits that the person can transact.

  1. Stock Allocation

Davie should allocate 40.15% of his annual TTD to stock. Usually, stocks are recommended to be held for more than five years. McDonnell (2008) recommends that given the level of life expectancy and the age of a person, it is recommendable to subtract the age of a person from 100 to get the portion of the money that would be invested in the stock. In this case, Davie is aged 27 which means that 73% of the available money for the investment (annual income less his daily spending and miscellaneous allocation) should be allocated to the stock. Given that the annual spending and miscellaneous allocation for Davie account for 45% of his annual TTD, then the money that is available for investment is 55%. 73% of this amount is allocated to the stock, and that is how 40.15% is arrived at

Usually, the higher allocation for the stock is since the stock earns higher returns in the market. The Usually, when held for more than five years, stocks give dividends and allows the investor to get the capital gain. Ownership of the stock would help Davie to take advantage of the economic growth. This is because the corporate earnings grow together with the economy, which increases the investments earnings (Sampson, 2006). The stock will also help to stay ahead of the inflation. Stocks have a historical average annual return of 10% which is higher than 3.2% average annual inflation. The stocks are freely traded in the stock market which creates relatively higher liquidity than other fixed forms of investments. Davie will be able to sell the stock at any time that he wishes.

However, while the stock is easy to sell and buy and have potential to generate high returns (through dividends and capital gain), they have a very high risk. The price of the stock changes rapidly depending on external (economic, legal, political, social, or technological issues) or internal factors (such as investment by the company, poor management, and other issues such as fraud). This creates a high risk that the investor will lose the money invested in the stock. On addition to this, it requires a lot of time for the to decide on the stocks to invest. Davie would be required to research on all the companies to determine the most profitable one through their financial reports. Davis will also have to monitor the stock because in the investment period even the price of the best company falls in the bear market, market correction, and market crash.

  • Bond Allocation

14.85% of Davie’s annual TTD should be allocated to bonds. Bonds have very low quality in comparison to that of the stocks. For this reason, they are considered risk-free. Bonds are not affected by the daily price fluctuations compared to the stock. On the addition to this, as a bondholder, Davie will enjoy the measure of legal protection. Bonds are issued by the government which is considered incapable of going bankrupt. In the case of the corporate bonds, when the company goes on bankrupt the bondholders are usually given privilege over the stockholders and thus have high assurance that their money will be obtained. Usually, bonds pay annual or semi-annual interest which is paid twice or once per year.

However, while the bonds provide risk-free (or lower risk) investment they give a very low return to the investor. Usually, stocks can generate even up to ten times the returns that the investor can get in bonds. As such, the amount of money allocated in bond was the lowest because even though they are a safe investment, they give a very low return. Bonds are also less volatile compared to the stocks. When Davie buys a bond for five years, he will have to hold it for the term period to enjoy all the benefits (interest payment). If Davie sells the bond before the maturity period, he will sell it at a discount. This means that he will get less money than invested (Stanyer, 2014).

  1. Alternative Assets, Foreign Securities, And Change in Asset Allocation

The economy of USA is expected to grow by around 2% to 2020. On the other hand, the European economy is expected to grow at average 1.8% annually over the next five years, and Asia Pacific Economy is expected to grow by an average 5.3%. On addition, the interest rates in the US are lower than those in Europe and Asia Pacific. This means there is a higher potential to earn more returns in the foreign stock markets and bond markets. As such, Davie should consider including the foreign assets in his investment portfolio to maximize gains.

The economic changes, which would increase the economic gains, or growth in some industries will lead to change in the asset allocation. In the period of high economic risk, when there is political or any other issue that would cause the economy to be at high risk, the allocation for the stocks would be reduced in favour for the bonds. This means that the stocks would be sold and bonds purchased. This would help to create certainty and minimize the level of the expected risk. When the economy is at boom, the allocation for the bonds would be reduced in favour for the stocks. This would help to maximize the gains (Stanyer, 2014). The cash allocation would remain the same because it is meant to cater for Davie bills and ensure his liquidity.


  1. Chosen Strategy

The active strategy would require Davie to act as the portfolio manager or consult the services of the portfolio manager who will carry out periodical analysis and future projections in changing the assets allocations and the types of the investment vehicles that are included in the portfolio. On the other hand, the Passive strategy would require Davie to purchase the investment assets and hold it to the terms. Usually, a passive strategy involves a low level of costs and is tax efficient.

Davie should adopt a strategy that has both passive and active elements. In the bond investments, Davie should adopt a passive strategy. In this case, he would invest in the bonds for fixed period, (five years or ten years) and then hold it to term. Usually, when the bond is involved, it is not profitable to use an active strategy. This is because when the bonds are sold before term, the bond will be sold at a discount and the investors would not get full benefits. In addition to this is a passive strategy while investing in bonds will be transparency, has the ultra-low price and tax efficiency (Stanyer, 2014).

On the other hand, the stock should be managed actively. Usually, the stock prices of the company change rapidly depending on the economic patterns and investors sentiments. The active investment would allow Davie to increase returns and flexibility. However, active management will be costlier because Davie will have to consult the benefits of the portfolio manager. On addition, this method involves high risk because it is based on projections which can be wrong. However, the method is more likely to increase return. As such, it would be recommendable that Davie undertake a strategy that integrates both passive and active elements.

  1. Risk and Performance Analysis

The client is not willing to take up much risk. This is because he earns $450,000 annually and the investment will be made on the annual income. This means that if a large amount of money is lost, Davie would not be able to accomplish his investment objective of purchasing a townhouse and smaller apartments to rent for a total of $6,800,000. The integration of both active and passive method will help to mimosa the investment risk while ensuring that Davie get a high level of returns.

The portfolio performance will be assessed on a weekly basis. This period would help to identify whether the portfolio is meeting the set returns level. Economic performance, Industrial news, and company related news will help to make me consider changing the composition of the portfolio. This is because, for example, when there is a positive news the stock price of the company is expected to rise, and purchasing such stock would help to raise the capital gain. The conditions or circumstances that will make me advise taking some action are events that are likely to cause major increase or decrees in returns from a given investment vehicle (Stanyer, 2014). For example, when a company announces a strategic move that is likely to increase its annual returns, I would advise purchasing the stock or increasing the number of shares in that returns.

  1. Investment Benchmarks

Various classes of assets exhibit various risk and return features. Passive benchmarks serve to represent risk and returns characteristics as t is used in the asset mix. According to Kraft (2004) a valid benchmark should have eight main features. These are unambiguous, appropriate, accountable, reflective of the current investment opinion, investable and specified in advance. It would be recommendable for Davie to use blended benchmark. This is because Single indices such as Dow Jones Industrial Average, FTSE 250, and S&P 500, do not reflect the purpose and nature of the investment. Use of blended benchmark will provide an appropriate reference for the selection and performance of attribution of the Davie portfolio. The blended benchmark will be created easily and used using such software as Kwanti’s Portfolio Lab, y Pertrac, Zephyr and others (Stanyer, 2014). This benchmark will help to choose rebalancing frequency, assign weights, and include features that would offer an optimal reference for the portfolio.


Elton, E. and Gruber, M. 2011. Investments and portfolio performance. Singapore Hackensack, N.J: World Scientific.

Kraft, H. 2004. Optimal Portfolios with Stochastic Interest Rates and Defaultable Assets. Berlin, Heidelberg: Springer Berlin Heidelberg.

McDonnell, P. 2008. Optimal portfolio modeling: models to maximize return and control risk in Excel and R + CD-ROM. Hoboken, N.J: John Wiley and Sons.

Moraif, K. 2015. Buy, hold, and sell: the investment strategy that could save you from the next market crash. Hoboken, New Jersey: Wiley.

Sampson, G. 2006. Multi asset class investment strategy. Chichester, England Hoboken, NJ: Wiley.

Stanyer, P. 2014. Guide to investment strategy: how to understand markets, risk, rewards and behaviour. London: Profile Books.