Securities Analysis and Portfolio Management Essay

Securities Analysis and Portfolio Management - Essay ExampleLouis is no longer working as a stock certificate broker and Simon is now apply the services of Cheryl who has strong views about Simons portfolio. Cheryl, a graduate in finance from York University, believes that markets are essentially efficient and admires the work of Harry Markowitz and Fama and French. She believes that the important social function is to have a good portfolio rather than good individual investments. Cheryl tells Simon that she doesnt feel that he even has the best companies now even if they had been when the portfolio had been set up. Cheryl goes on to say that that a good portfolio needs to include exposure to overseas companies and smaller companies thus reducing the beta and improving the alpha of the portfolio. Cheryl also argued that it is life-sustaining to watch the momentum and have stop-losses on all the holdings in order to protect against primary downside movements. Simon is very concern ed about his share holdings after talking to Cheryl and has approached you for advice. You ascertain that Simon, who doesnt work, is 65 years old and is receiving a more than adequate income from his existing portfolio. Simon rents a flat in a seaside recede and does not wish to buy property. Simon is not willing to take on any additional danger. In addition to the shares discussed supra Simon has ?14,000 in a rim account and ?300,000 in medium dated conventional gilts. Simon has two children from his short lived marriage to Susan who both have well paid jobs. Simon does not wish to fare assets to his children as he would prefer to support any future grandchildren he has through their education. Simons ten equity holdings are Company PE Ratio Dividend retort Dividend Cover Equity Market Capitalisation (?m) BAE Systems 7.9 4.96% 2.5 11,003 BP 7.2 8.84% 1.6 77,353 British American Tobacco 15.4 4.2% 1.5 47,264 BT Group 7.6 4.89% 2.7 10,956 Diageo 14.8 3.47% 1.9 66,234 GlaxoSmithKl ine 10.5 4.78% 2.0 66,234 HSBC 29.9 3.34% 1.0 116,479 Marks and Spencer 10.9 4.16% 2.2 5,705 Rolls Royce 14.7 2.56% 2.6 10,847 Unilever 16.1 2.31% 3.2 23,281 Required (a) With relevant statistics, discuss the strengths and weaknesses of Simons existing portfolio above (make reference to eps/dps growth betas price performance and sector spread of the ten shareholdings). (35 marks) Simons stock portfolio has been constructed according to the established views of modern portfolio theory, which seeks alpha by selecting stock holdings in companies that will outperform the return of the general stock indices or interest rates over time. Modern portfolio theory is based in the tenets of risk management, which analyze security investments according to beta or the volatility of stock pricing due to company specific business activities, market factors, macroeconomic changes, indwelling disasters, wars, etc. Investors have different expectations, personal, and professional motivations in buil ding their investments and with this also comes varying appetites or tolerances for risk. Modern portfolio theory was developed largely before ETF vehicles existed to footprint index performance through large, distributed