Establishing the relationship>> data gathering and goal setting>> Identification of financial

aspects>> preparation of recommendation>> implementation>> monitoring and revision

Investment Planning

Solution:

Final step: (144882-122300)/122300 = 18.46%

SOLUTION:

PV=2500000
N=180
I/Y = 8.5/12
PMT = 24618

P1=1, P2=11
BAL = 2421238
PMT = 24618
I/Y = 9.25/12
N = ? 184.8

P1=1, P2=14
BAL = 2333570

PMT = 24618
N = 180-25 = 155
I/Y = 9.25/12
PV = 2222303
HENCE PREPAYMENT REQUIRED = 2333570-2222303 = 111267 APPROX

Asset Allocation for CFP

Asset allocation is an investment strategy that aims to balance risk and reward by
apportioning a portfolios assets according to an individuals goals, risk tolerance
and investment horizon.
Asset allocation is the process of deciding how to distribute an investors wealth
among different countries and asset classes for investment purposes. An asset class
is comprised of securities that have similar characteristics, attributes, and
risk/return relationships.
The asset allocation decision is not an isolated choice; rather, it is a component of
a portfolio management process.
Types of Asset Allocation
Strategic Asset Allocation
A portfolio strategy that involves periodically rebalancing the portfolio in order
to maintain a long-term goal for asset allocation
At the inception of the portfolio, a base policy mix is established based on
expected returns
Because the value of assets can change given market conditions, the portfolio
constantly needs to be re-adjusted to meet the policy
Tactical Asset Allocation:
An active management portfolio strategy that rebalances the percentage of assets
held in various categories in order to take advantage of market pricing anomalies
or strong market sectors
This strategy allows portfolio managers to create extra value by taking advantage
of certain situations in the marketplace
It is moderately active strategy

Insured Asset Allocation:

Insured asset allocation assumes that expected market returns and risks are
constant over time, while the investors objectives and constraints change as his or
her wealth position changes.
For example, rising portfolio values increase the investors wealth and
consequently his or her ability to handle risk, which means the investor can
increase his or her exposure to risky assets.
Declines in the portfolios value lower the investors wealth, consequently
decreasing his or her ability to handle risk, which means the portfolios exposure
to risky assets must decline.
Often, insured asset allocation involves only two assets, such as common stocks
and T-bills.
As stock prices rise, the asset allocation increases the stock component.
As stock prices fall, the stock component of the mix falls while the T-bill
component increases.
This is opposite of what would happen under tactical asset allocation.
Insured asset allocation is like the integrated approach without the feedback loop
on the capital market side
It is sometimes called a constant proportion strategy because of the shifts that
occur as wealth changes.
Rebalancing
Rebalancing is bringing your portfolio back to your original asset allocation mix.
This is necessary because over time some of your investments may become out of
alignment with your investment goals. Youll find that some of your investments
will grow faster than others. By rebalancing, youll ensure that your portfolio does
not overemphasize one or more asset categories, and youll return your portfolio to
a comfortable level of risk.

There are basically three different ways you can rebalance your portfolio:
You can sell off investments from over-weighted asset categories and use the
proceeds to purchase
investments for under-weighted asset categories.
You can purchase new investments for under-weighted asset categories.
If you are making continuous contributions to the portfolio, you can alter your
contributions so that more investments go to under-weighted asset categories until
your portfolio is back into balance.

Investment with a Portfolio and Rebalancing

Assume a requirement of 1500000 after 10 years. Investment is made in equity and
debt in a ratio of 75:25. Investment is made at the beginning of the period. Find
amount to be invested in equity and debt each. Rate of return on equity 11% and
debt 8%.
Step-1:
Assume investment amount of 1000. Hence 750 will be invested in equity and 250 will be
invested in debt.
Step-2:
As both equity and debt grow at their own rate, find FV of both in isolation
Equity : PMT(bgn)=750

N=10

i/y=11

FV:13921

Debt : PMT(bgn)=250

N=10

i/y=8

FV:3911

Total value of the portfolio: 17832

If investment of 1000 accumulates 17832, how much to invest for 1500000?
Cross multiplication: 1500000*1000/17832 = 84120 (approx)

Equity investment=63090
Debt investment=21030
Portfolio Rebalancing
Assume in the above case if proportion changes after 5 years to 50:50, the amount of investment
in each component will be

Step-1:
Assume investment amount of 1000. Hence 750 will be invested in equity and 250 will be
invested in debt.
Step-2:
As both equity and debt grow at their own rate, find FV of both in isolation
Equity : PMT(bgn)=750

N=5

i/y=11

FV:5185

Debt : PMT(bgn)=250

N=5

i/y=8

FV:1584

Total value of the portfolio after 5 years: 6769

Now the portfolio will be divided in 50:50
Step-3:
Equity : PV=3385

PMT(bgn)=500

N=5

i/y=11

FV:9160

Debt : PV=3385

PMT(bgn)=500

N=5

i/y=8

FV:8141

Hence the total value of portfolio = 17301

Cross multiplication: 1500000*1000/17301 =86700 (annual investment)