Explaining The Process Of Portfolio Management For Stock Funds Research Paper

Explaining The Process Of Portfolio Management For Stock Funds Performance - Research Paper Example Subsequently, as an investor, the third step of portfolio management is asset allocation that is able to make an attempt of satisfying investors' needs and objectives and at the same time, help in making decision regarding the proportion of wealth invested in each major asset categories (Bodie et al., 2005). As an investor, the main aim of asset allocation and investment is capital appreciation. I intend to make sound investment decisions while maintaining a level of moderate risk tolerance in the pursuit of high return. Hence I will define myself as a moderate investor with a risk aversion of 6 (Bodie et al., 2005). Considering my age, I am a young investment with a long investment horizon, hence my investment decisions will be based on less need for immediate liquidity, long term investment need and at the same time be able to tolerate greater risk in the short time. In the macro level, my investment decisions will be affected by the overall economic growth of the country and regio n and at the same time government decisions like Tax concerns and regulatory factors. Therefore, considering the objectives and constraints presented above, I would be better off if investing in risky assets in pursuit of higher returns. With a risk aversion of 6, I would invest my wealth in stocks while allocating remainders to treasury bills. The important elements of my investment portfolio strategy is my current assets, time horizon,  expected return, tolerable losses, and portfolio benchmarks and they are explained below. Current Assets As an investor, the total net assets available is $10,000,000 in assets.   Time Horizon The investment that is intended has one year time horizon.   Overall Portfolio Expected Annual Return As an investors, I expects a portfolio return that is  5 percentage points above the rate of inflation.   I have arrived at this percentage due to the fact that inflation will vary over time; hence I am using the incremental return  over  inflat ion as a determinant of whether I am able to meet my goals. As a guideline, here are the real annual  returns (above inflation) that I use:   Large-cap stocks: 6.0% Mid/small-cap stocks: 6.0% International stocks: 7.5%   Bonds: 4.0% By creating a balanced portfolio, I will be able to have a blend of the returns mentioned above based on my asset-allocation mix. Loss Limit as a new investor, I would accept losing not more that 10% in the year of investment. At this rate with my tolerance for risk, I am willing to accept a loss of 10% and if my portfolio falls by more than he prescribed percentage, I will have to re-examine my portfolio and create a new portfolio for investment. Asset Allocation I will set the following  lower limits, targets, and upper limits for investment in each asset class.  Ã‚     Asset Allocation Lower Limit ( % ) Target ( % ) Upper Limit ( % ) Large-cap value stocks 30 25 25 Large-cap growth stocks 25 30 35 Mid/small-cap stocks 20 25 25 Internationa l stocks 25 20 15 By creating the above asset allocation, it is hoped that the portfolio investment will realise positive growth. If not, then the asset allocation will be rebalanced in the investment horizon. Evaluation Benchmarks It is important to evaluate myself by comparing the total return of each stock with its