2.

Ignoring taxation, discuss the advantages and disadvantages of holding such a portfolio of
investments in the circumstances of Alex Plc.
Details of investment

Type of security Value( Percentage of Average

£ investment % return
million over the
) last 12
months
UK equities 3.3 39.29 15
US equities 1.8 21.43 13.5
UK corporate debt 0.9 10.71 8.2
Long-term government debt 2 23.81 7.4
Three-month treasury bonds 0.4 4.76 5

Alex invests 61% in equity shares and 29% in debt securities and bonds. In equity financing, 75% of
investment is in the UK equity market in which average return is 12% and in UK equity shares 60% of
investment is in small companies which details are as follows.
Share Dividen Expected
No.
Company Beta price d yield return
Shares
(£) (%) (%)
Rasiak 70,000 1.27 3.75 5.6 12
Johnson 150,000 1.53 4.25 3.5 16
Smith 100,000 1.01 2.5 4.2 14
Bisgaard 80,000 0.95 4.5 6.2 9.5
Idlakez 130,000 0.82 3.5 4.8 15

Following are the advantages and disadvantages is Alex investment portfolio

Advantages of this investment portfolio
Advantage of investment in equity shares (61%)

Volume of profit
Alex Plc invests more in equity shares as compared to debt bonds and securities which result in a high volume
of profit. The equity shares have the potential to generate more return as compared to debt securities where
the investor can only have a fixed amount of profit over some time. 
Dividend income
After making all the payments including the payment of preference shares, the left portion will be distributed
among the shareholder as a dividend. The amount of dividend is not fixed, either they are no guarantee of
dividend income every year but still, the amount of dividend is higher as compared to interest or markup on
fixed debt securities and bonds. The amount of dividend depends upon the efficiency of the company.
Bonus shares
Investment in equity shares may offer to have bonus shares instead of the cash dividend. This way Alex can
enhance the control in the companies and take part in the decision-making process of the company. The
bonus shares can be retained and enjoy the dividend income or sale out to the general public for cash
Right on income and asset
In equity shares, investors have the right to dividend income as well as on net assets of the company. In the
event of liquidation and after making all the liabilities, the net assets are distributed among the shareholder
of the company.
Decision making
In the company in which Alex makes the investments, Alex can become a part of the decision-making process.
Here the management takes the instruction from Alex, according to the portion of equity shares held by Alex.
In debt securities, the holder will not become a part of the decision-making process.
Advantage of investment in debt securities and bonds (29%)

Fixed and secure income

The 29% of the investment of Alex is based on debt investment. The debt investment may not promise high
profits but it may promise stable and fix income over some time. To keep the investment secure, the ratio of
debt and equity investments was very appropriate.
Interest and Principal amount
The debt investment offers both, interest over the life of the bond and the principal amount of debt over the
maturity period of the bond. the investment in debt is highly secure, at the time of distribution of profit, the
debt holders were the first ones to pay the interest and even in the time of liquidation, the debt holders were
the first ones to clear the debt-related amounts.
Volatility in equity market
In the equity market, the impact of economic, political, financial, and other matters impact positively and
negatively on the equity market. This is called the volatility of the equity market where the value of a share
moves up and down due to the economic, political, financial, and other matters impacts. Unlike equity shares,
the debt securities value remains the same. The number of interest payments and the principal amount will
remain the same on every event. Resection period
In the recession period when the prices of stock fall and the market crash. The general market offers less
return due to the recession period. In this recession time, the debt bonds perform better than the equity
bonds and give better profits as compared to equity shares.
Debt investment is secure by collateral assets
The debt securities and bonds are secured by collateral assets which mean if the company is not in a position
to meet its debt liabilities then the secure asset will sell to meet the debt liabilities. The collateral asset makes
the debt investment highly secure.
Disadvantages of this investment portfolio

Disadvantage of investment in equity shares (61%)

Profit
The equity investment portion of Alex is 61%, and 61% of investment is not promised a fixed or stable income.
The amount of dividend is decided by the management of the company. If there is a loss no dividend, and if
there is profit then the board of directors decides, how much to retain and how much to distribute among the
shareholders.
High risky
The equity investment portion of Alex is 61%and the equity investment is very risky as compared to debt
investments. In equity investments, there is a guarantee of fixed profits and return of the principal amounts.
Equity shares are not secure by any collateral assets like in debt securities. Their value fluctuates up and down
with the impact of economic, financial, political, and other matters.
Decision making process
In equity share, the investors can be a part of decision making but the portion of the equity is very small and
as a result, the part of small equity investor is not effective. The equity investors hardly make an impact on a
decision due to the portion of their investment. The value of the investment in equity is 5million but it is
divided into several different companies
Residual claim on net assets
As the 61% of investment of Alex is in equity shares and the equity holder always gets the remaining part on
both the profit as well as the net assets at the time of liquidation. At the time of dividend, after making all the
payments including the dividends of preference shares, the management decides the part of the remaining
profit to retain and distribute among the shareholders.
Similarly, at the time of liquidation first company make all the liabilities and then the remaining amount of net
assets are distributed among the shareholders

Disadvantage of investment in debt securities and bonds (29%)

Conservative Approach
Debt investment provides diversification in investment to reduce the risk. But 29% of debt causes the loss of
opportunity profit which can be earned by investing some of its part in equity shares. The 29% investment
lead to the conservative approach. The return on debt investment is lower than the return on equity
investment.