Question

Blair & Rosen (B&R) plc is a U.K. based brokerage firm that specializes In building investment portfolios designed to meet the specific needs of its clients who are mostly private investors willing to invest their r savings in stocks and shares. One client who contacted B&R recently has a maximum of $500,000 to invest. The company`s investment advisor has decided to recommend the portfolio consisting of two investment funds: An internet fund where the companies are all active in internet businesses of one kind or another and the blue-chip fund which is more conservative and traditional. The internet fund has a projected annual return over the next few years of 12 %, while the blue-chip fund has a projected annual return of 9%. The investment advisor has decided that at most, $350,000 of the client`s funds should be invested in the internet fund. B&R services include risk rating for each investment alternative. The internet fund which is more risky of the two alternatives has a risk rating of 6 for every thousand dollar invested while the blue-chip fund has a risk rating of 4 per thousand dollar invested. So, for example, if $10000 is invested in each of the two investments funds, B&R risk rating for the portfolio would be 6(10) + 4(10)= 100. Finally B&R has developed a questionnaire to measure each client`s risk tolerance. Based on the responses, each client is classified as conservative, moderate or aggressive investor. The questionnaire results have classified the current client as a moderate investor. B&R recommends that a client who`s a moderate investor limit his or her portfolio to a maximum risk rating of 240. You have been asked to help the B&R investment advisor. What is the recommended investment portfolio for this client? What is the annual return for the portfolio? A second client , also with $500,000 has been classified as aggressive. B&R recommends that the maximum portfolio risk rating for an aggressive investor is 320. What is the recommended investment portfolio for this aggressive investor

Answer 1

Blair & Rosen (B&R) Plc.

Recommendation for moderate investor:

Internet fund = 96/240 * $500,000 = $200,000

Blue-chip fund = 144/240 * $500,000 = $300,000

Annual return for the portfolio:

Internet fund = $200,000 * 12% = $24,000

Blue-chip fund = $300,000 * 9% = $27,000

Total portfolio returns = $51,000

Annual returns of portfolio = $51,000/$500,000 * 100 = 10.2%

Recommendation for aggressive investor:

Internet fund = 192/320 * $500,000 = $300,000

Blue-chip fund = 128/320 * $500,000 = $200,000

Explanation:

a) Data and Calculations:

Maximum investible savings = $500,000

Projected annual return of the internet fund = 12%

Projected annual return of the blue-chip fund = 9%

Maximum determined amount to invest in the internet fund = $350,000

Risk rating for the internet fund = 6/1,000

Risk rating for the blue-chip fund = 4/1,000

Maximum risk rating for a moderate investor = 240

Maximum risk rating for an aggressive investor = 320

Recommendation for moderate investor:

Internet fund = 96/240 * $500,000 = $200,000

Blue-chip fund = 144/240 * $500,000 = $300,000

Annual return for the portfolio:

Internet fund = $200,000 * 12% = $24,000

Blue-chip fund = $300,000 * 9% = $27,000

Total returns = $51,000

Annual returns of portfolio = $51,000/$500,000 * 100 = 10.2%

Recommendation for aggressive investor:

Internet fund = 192/320 * $500,000 = $300,000

Blue-chip fund = 128/320 * $500,000 = $200,000