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INVESTING AND PRIVATE EQUITY
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INVESTING AND PRIVATE EQUITY ANSWERS TO THE QUESTIONS
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ContentsQuestion 1 - Optimal Portfolio Selection, Relationship between risk & return...............................................................2
Explain your understanding of the concept of Investing & the overall purpose people have for investing. Construct
your own (or advise someone how to do a) brief Policy Statement for Investments..................................................2
Discuss the principles of HPR and HPY. On January 1, suppose you bought 100 shares of stock in XYZ Company for
$34 a share and a year later you sold it for $39 a share. During the year, you received a cash dividend of $1.50 a
share. Compute your HPR and HPY and also explain the calculation steps.................................................................4
Question 2 - Efficiency; Statistical/Quantitative characterization of Asset Markets........................................................5
Evaluate at least 4 Global Investment Choices along with their advantages and disadvantages. Which of these
Investments would you determine are suitable for you and why or why not. Briefly, explain your understanding of
Market efficiency with examples.................................................................................................................................5
As a new analyst, you have calculated the following annual rates of return for the stocks of both Lauren
Corporation and Kayleigh industries. Because these Companies produce similar products, continue your analysis
by computing their covariance. Show all calculations. Also, calculate the coefficient of correlation. Prepare a table
showing your calculations and explain how to interpret the results. Would the combination of the common stock
of Lauren and Kayleigh be good for diversification?....................................................................................................8
Question 3 - Active & Passive Portfolio Management...................................................................................................10
Explain the concept of Active & Passive Portfolio Management and according to you what are their pros and cons.
Give suitable examples to illustrate your answer......................................................................................................10
What do you understand by risk aversion and what evidence indicates that investors are generally risk averse?...11
Given the following market values of stocks in your portfolio and their expected rates of return, what is the
expected rate of return for your common stock portfolio?.......................................................................................11
Question 4 - Asset allocation; Behavior, performance evaluation of MFs & Hedge Funds............................................13
Explain your understanding of the 3-step Investment valuation approach. Discuss why you would not expect all
industries to have a similar relationship to the economy. Give an example of 2 industries that have a different
relationship to the economy.....................................................................................................................................13
What are Mutual Funds and how will you evaluate their performance. How much of your investible assets will you
allocate to Mutual Funds? Describe in detail the Private Equity investments, different types of such investments
and specifically explain how PE works in the case of distressed Companies, along with relevant examples. What
are some of the differences between Corporate Finance & Private Equity?.............................................................14
References..................................................................................................................................................................... 18
,Question 1 - Optimal Portfolio Selection, Relationship
between risk & return
Explain your understanding of the concept of Investing & the overall
purpose people have for investing. Construct your own (or advise
someone how to do a) brief Policy Statement for Investments.
ANSWER: INVESTMENT & ITS PURPOSE:
Investing is the process of investing money or other resources to an asset or
business with the expectation of future returns. The overall goal of investing is for
people to enhance their wealth, achieve their financial goals, or create a passive
income stream. People can also use investing to protect their money against
inflation, taxes, and other threats.
Investors typically make investments in a variety of asset classes, including stocks,
bonds, commodities, real estate, and alternative assets. When choosing an
investment, investors must take into account their risk tolerance, investing
objectives, and time horizon because each asset class offers a distinct level of risk
and potential return.
The overall reason that people invest varies depending on their financial
circumstances, timeline, risk tolerance, and personal aspirations etc. The following
are some typical motivations for investing:
To create money from dividends, interest, or rent and supplement their
normal income or retirement income.
To accumulate wealth over time and achieve financial security or
independence.
to set aside money with a specific purpose in mind, such as paying for a
home, school, beginning a business, or international travel.
To support causes or beliefs they care about and have a beneficial impact on
society or the environment.
To protect themselves from inflation and maintain their purchasing power in
the face of rising prices.
No matter why someone wants to invest, they need to have a strategy and plan in
place that fits with their preferences and objectives. In order to lessen their
exposure to market swings, they should diversify their portfolio and be aware of
the potential risks and rewards of various forms of investments. Investing needs
discipline, patience and research to achieve long-term success.
POLICY STATEMENT:
An investing policy statement (IPS) is a written statement of the goals, limitations,
and preferences of an individual or group of investors. It acts as a reference for
selecting investments and assessing the portfolio's performance. The following
components ought to be included in an investment policy statement:
The objective and scope of the investment program, including the investor's
expectations for return, time horizon, risk tolerance, and aims(s).
The asset allocation strategy, including the target weights and ranges for
various asset classes, the selection and rebalancing criteria for assets, and
the performance benchmarks.
The obligations that each party to the investment process has, including the
investor(s), investment manager(s), custodian(s), and consultant(s).
, The guidelines for evaluating performance and risk, the methods for
modifying the policy statement, and the policies and procedures for
monitoring and reviewing the investment program.
The ethical and social considerations.
To rebalance, review and revise social procedures.
Investment policies should be explicit, brief, and in line with the circumstances and
desires of the investor. Also, it should be adaptable enough to take into account
shifting investor demands and market situations. To maintain its applicability and
effectiveness, a policy statement for investments should be evaluated and revised
on a regular basis.
A simple investing policy statement could resemble something like this:
An outline of a policy statement for investments in the Local financial sector:
The purpose of this policy statement is to offer direction to portfolio managers who
are in charge of making investments in the Local finance sector. The policy
statement details the restrictions that apply to this investment generalization's
asset allocation, risk tolerance, leverage, liquidity, and foreign security investment.
Asset allocation: Banks, insurance firms, microfinance institutions, and other
financial intermediaries shall get no more than 10% of the portfolio managers' total
allotment. To reduce concentration risk and exposure to particular industries or
businesses, the portfolio managers should diversify the investments in this area.
Risk tolerance: Portfolio managers should evaluate the risk-return profile of every
investment made in the Local financial sector and make sure that it is consistent
with the portfolio's overall risk tolerance. The portfolio managers should keep track
of political, economic, and regulatory changes as how they affect the financial
industry. When investing in Local currency or other foreign currencies, portfolio
managers should also take into account currency risk and hedging possibilities.
leverage: In order to minimize excessive volatility and potential losses, portfolio
managers should keep their usage of leverage to a minimum when investing in the
Local financial sector. The portfolio managers should keep a minimum equity ratio
of 30% and should not borrow more than 20% of the value of their investments in
this category.
Liquidity: The portfolio managers need to make sure that the investments in the
Local financial sector are liquid enough to be sold on the open market. Investments
in illiquid or unlisted securities that can be challenging to sell or value should be
avoided by portfolio managers. The portfolio managers should also keep enough
cash on hand to cover any margin calls or redemption requests.
Investment restrictions on foreign securities: The portfolio managers shall
abide by all applicable laws and regulations of Institute and the surroundings
where they make investments. Additionally, the portfolio managers must abide by
the restrictions and limitations on foreign exchange set by the State Bank and
other authorities. The Extended Fund Facility program mandates that the portfolio
managers notify the Finance Division and concerned monetary institutes of any
transactions or holdings of foreign securities.
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