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Financial Instruments and Portfolio Project

Student’s Name
Professor’s Name
Institute Name
Date
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a) Investor Policy Statement

My client is 38 years old, and a partner in a law firm, and they are married with one child

aged 10. Regarding Risk Tolerance, Client 3 indicates a strong inclination towards the risk

aversion, prioritizing the predictability and stability in the investment strategy. As a partner in the

law firm, the client has specific goals that include finding education for the child, planning

retirement, and indulging in personal hobbies through the purchase of a narrowboat. The primary

investment objectives of a client are income generation and long-term growth to secure a

comfortable retirement. Additionally, the goal is to generate funds for the education of the child

and to pursue a passion for nature watching and sailing.

The client has a long-term investment horizon that is aligned with a strategy that

combines growth and stability. The estimated total wealth of a client is £825,000 which provides

the foundation for a well-diversified investment portfolio. The current annual income of

£300,000, and estimated annual spending of £300,000 shows a balanced financial lifestyle. The

amount available for investment is £525,000, and it is calculated by subtracting the annual

expenditure from total wealth yields. Finally, the recommended strategy is a balanced portfolio

encompassing fixed-income instruments, equities, and alternative investments. This approach

provides stability, and long-term growth and helps in the generation of income.
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b) Financial Investment Instruments

Company Ticker Number of Current Total

Shares Market Price Investments
Associated British ABF 29 1,707.00 £49,443.00
Foods
British American BATS 20 2,576.50 £51,530.00
Tobacco
Unilever ULVR 11 4,663.00 £51,293.00
Total Equity £152,266.00
Table 1 - Equities

Issuer Maturity Total Investments

SSE 22 September 2022 £51,878.75

National Grid Electricity 13 January 2031 £53,983.29

Transmission
Treasury 22 July 2052 £45,220.82
Total Bonds £150,082.86
Table 2 - Bonds

Instruments Types Total Investments

ASI Asia Pacific Equity (Mutual Fund) £48,600.00

WisdomTree Physical Gold (ETF) £5,744.56

UK Commercial Property Reit Limited (REIT) £35,725.98

Total Alternatives £90,070.54

Table 3 – Alternative Investments

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Category Proportion Of Cash (%)

Equities 34.5%

Bonds 33.3%

Alternatives 20.2%

Cash £234,490.40

Table 4 – Cash

The total cost of the portfolio, which includes bonds, equities, and alternative investments

is equal to £392,419.40, which is within available investment amounts of £525,000 demonstrates

a prudent allocation of funds across different classes of assets. The composition of the portfolio

shows a balanced distribution of available funds that ensures diversity across bonds, equities, and

alternative investments, and the proportion of cash allocation is aligned with the risk profile of

the client and investment goals, this approach aims to optimize return while managing risk

effectively. The portfolio is structured and meets the requirements of clients' risk preferences,

financial objectives, and available resources.

c) Chosen Equities

1. Associated British Foods (ABF)

Justification: ABF, as a diversified food producer is aligned with the risk-averse of the client’s

nature. The diverse portfolio of a company includes popular brands and offers resilience in

economic downturns, with a beta of 0.8, ABF provides a balance between potential growth and

stability.

2. British American Tobacco (BATS)

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Justification: BATS, an industry leader in Tobacco is chosen for its defensive characteristics,

and it typically demonstrates the inelastic demand, making BATS less sensitive to economic

fluctuation. With a low value of Beta of 0.4, BATS indicates the portfolio stability and it is

crucial for risk-averse clients, and the dividend yield of 2.31% contributes the income generation

and is aligned with the long-term financial goals of clients.

3. Unilever (ULVR)

Justification: ULVR, a global consumer good giant, is included in the equities due to its

consistent performance and attributes, and the focus of a company on essential products

contributes the financial stability, and its low beta of 0.3 shows resilience in its overall portfolio.

The global presence of ULVR is aligned with the diversified investment approach and with a

dividend yield of 3.75% adds an income component to the portfolio.

In summary, the chosen equities selected for the client’s portfolio are aligned with

Investor Policy Statements, and it is aligned and take into consideration income generation, risk

aversion, long-term stability, and diversification. The combination of these equities aims to

create a well-rounded and balanced investment portfolio that is tailored to the unique financial

needs of the client’s objectives and performances.

d) Investment Instruments other than equities

1. SSE Corporate Bond (Fixed Income)

Justification: The SSE Corporate Bond provides a regular income and stability through fixed

coupon payments, and with a beta value of 0.5, it contributes to a less volatile and balanced

portfolio. Looking into the client’s risk averse nature, the inclusion of a stable corporate bonds is
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aligned with the objective of preserving capital, and still managing to generate a predictable

income stream.

2. National Grid Electricity Transmission plc Bond (Fixed Income):

Justification: The bond provides exposure to the utilities sector, and it is known for consistent

cash flows and stability, with a slightly higher beta of 0.6, it shows a modest level of risk while

enhancing potential returns. The long maturity is aligned with the long-term client investment

horizon and the attractive coupon rate.

3. Treasury 3.75% 2052 (Government Bond)

Justification: These types of bonds are considered to be risk-free assets, and treasury assets with

a beta close to zero, serves as a hedge against the market volatility. The bond’s inclusion is

aligned with the client preference for stability and acts as a diversification tool. Also, the

extended maturity suits the long-term retirement planning objective.

4. ASI Asia Pacific Equity (Mutual Fund):

Justification: The ASI Asia Pacific Equity fund provides the exposure to the growing Asia-

Pacific region, and with a beta value of 0.9, it shows a slightly higher risk of return in the

portfolio that captures the potential growth opportunities. It is also aligned with diversification

beyond domestic markets and long-term horizons.

5. WisdomTree Physical Gold (ETF):

Justification: Gold is a classic safe-haven asset, and it is correlated with equities, and with a

beta close to zero, the WisdomTree Physical Gold ETF acts as a hedge against the uncertainty in
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the economy. This bond is also aligned with risk aversion and provides store of a value during

turbulent market conditions and provides diversification benefit.

6. UK Commercial Property Reit Limited (REIT):

Justification: Real Estate Investment Trusts (REITs) provide the exposure to property market

without the need for direct ownership, and with a beta value of 0.7 strikes a balance between

potential growth and stability, and it is also aligned with long-term wealth creation and

diversified portfolio.

In summary, non-equity investments strategically provide risk tolerance, and meet long-

term objectives and income needs. Each financial instrument contributes to the overall resilience

of the portfolio which ensures a well-rounded and diversified approach.

e) Beta and Expected Return of Portfolio

1. Calculation of Beta for Individual Investments:

a) Equities:

Associated British Foods (ABF): Beta = 0.8

British American Tobacco (BATS): Beta = 0.4

Unilever (ULVR): Beta = 0.3

b) Fixed-Income:

SSE Corporate Bond: Beta = 0.5

National Grid Bond: Beta = 0.6

Treasury 3.75% 2052: Beta = 0

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c) Alternatives:

ASI Asia Pacific Equity (Mutual Fund): Beta = 0.9

WisdomTree Physical Gold (ETF): Beta = 0

UK Commercial Property Reit Limited (REIT): Beta = 0.7

d) Portfolio Beta Calculation

The portfolio Beta is calculated by using the following formula (Ashlyn, 2023).

∑i-1= (WTotalWi×Betai)

By putting the values, it is calculated as 0.524.

e) Calculation of Expected Return:

Expected Return=Risk-Free Rate+ (Portfolio Beta×(Market Return−Risk-

Free Rate))Expected Return=Risk-Free Rate+(Portfolio Beta×(Market Return−Risk-Free Rate))

(James, 2023).

Assumptions:

 Risk-Free Rate: 3.00% (as provided in the data)

 Market Return: Assume 6.47% (as provided in the data)

Expected Return=3.00%+(0.524× (6.47%−3.00%)) Expected Return=3.00%+(0.524× (6.47%

−3.00%))

Expected Return≈4.80%Expected Return≈4.80%

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Performance Comparison:

The calculated portfolio value of beta of 0.524 indicates that the portfolio is expected to

be volatile (less) than the overall market value, and the expected return of approximately of

4.80% is in line with the risk-averse nature of the client, and conservative allocation of assets

(Charles, 2021). The market assumption and risk-free rate are based on the provided data, beta

values are assumed to be based on industrial characteristics and historical data, and the expected

return calculations use the Capital Asset Pricing Model (CAPM), and data sources include the

standard financial databases and provided information. To conclude, the portfolio with a beta

value of 0.524 and an expected return of 4.80% is positioned to provide a balanced risk-return

profile, and it is expected to perform more conservatively as compared to the broader market

(Will,2023).

f) Limitation of Portfolio

1. Market Risk Exposure

The portfolio performance is influenced by the market conditions and the assumed beta

values are based on the historical data, and with rapidly growing changing markets, actual beta

values may deviate from the portfolio of the risk profile of the portfolio.

2. Assumed Risk Tolerance

The risk tolerance is based on the risk-averse nature of a client, and the client’s risk

changes over time, and the portfolio may no longer be aligned with preferences that lead to a

potential need for adjustments.

3. Fixed-Income Market Volatility:

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Government bonds and corporate bonds provide stability, changes in interest rates that

have a direct impact on the market values, and assumed constant interest rates may affect the

performance of fixed-income assets.

4. Assumed Market Return

The expected return is calculated based on the assumed market return, and actual market

return may vary, and deviations may have an impact on the ability of portfolio to achieve the

targeted performance.

5. Lack of Customization

The portfolio is based on the assumed objectives and preferences, and individual client

circumstances such as specific ethical considerations or unique financial goals may not be fully

addressed in the standardized approach.

6. Long-Term Assumptions

The portfolio is designed for a long-term horizon and it is assumed that the client’s

circumstances and goals remain consistent. Changes in the life situation of clients and financial

goals provide adjustments to the portfolio over time.

7. Assumed Economic Conditions:

The portfolio assumes a relatively stable economic environment and unexpected

economic events such as geopolitical crises and recessions could impact the performance in the

portfolio in a way that are accounted in current analysis.

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References

Ashlyn Brooks (2023). How to Calculate the Beta of a Portfolio. Smart Asset.

https://smartasset.com/investing/how-to-calculate-the-beta-of-a-portfolio

James Chen (2023). Expected Return: Formula, How It Works, Limitations, Example.

Investopedia.

https://www.investopedia.com/terms/e/expectedreturn.asp

Will Kenton (2023). Capital Asset Pricing Model (CAPM) and Assumptions Explained.

Investopedia.

https://www.investopedia.com/terms/c/capm.asp

Charles Potters (2021). Using Beta to Understand a Stock's Risk. Investopedia.

https://www.investopedia.com/investing/beta-gauging-price-fluctuations/