Question

QUESTION 1

You and your workmates have come together to form an investment group called Pamodzi Investments; requiring each member to make monthly deposits into a pool account. You are planning to use these funds to create a portfolio of investments in preparation for you retirements.

Todate, the balance in the pool account amounts to K150,000-00 and you are about to make your first investment. However, there is a challenge due to different preferences of which securities to invest in. As a way towards consensus, a colleague proposes to consider the Collective Investment schemes that are available on the market. He has heard that this is a better way of accessing diversification benefits for small investors.

As an Investment Analyst in the group, you have been approached by your colleagues to advise on the options to consider and how to set up some investment guidelines for the operations of the group.

Required:

1. Explain the relevance of having an investment policy while highlighting its key component parts.

[15 Marks]

2. Explain the justification of the Modern Portfolio Theory approach to creating investment portfolios.

[15 Marks]

3. Explain diversification and how it could be achieved in this situation with reference to Zambian financial markets.

[10 Marks]

                                                                                             Total 40 Marks

Answer 1

Answer a) A Investment Policy statement (IPS) is an archive drafted between a portfolio director and a customer that diagrams general standards for the chief. This announcement gives the general speculation objectives and destinations of a customer and portrays the systems that the chief should utilize to meet these goals. Explicit data on issues, for example, resource distribution, hazard resistance, and liquidity necessities are remembered for a speculation strategy proclamation.

The IPS ought to incorporate observing and control systems to be trailed by everybody engaged with the venture procedure. This incorporates building up the recurrence of observing, determining benchmarks for examination of portfolio returns and solid systems for rolling out any future improvements to the IPS. Genuine speculators thoroughly consider the potential purposes behind changing their IPS, for example, monetary or way of life changes. Progressively significant, they determine the reasons not to change their IPS (i.e., momentary market execution).

The various advances either lead into the IPS, or are coordinated by the IPS.

Starting disclosure: The underlying dialogs and sharing of records that permits both the customer and the guide to find out around each other. From one viewpoint, this may incorporate finding out about the customer's conditions, objectives, salary needs, limitations, current property, hazard resilience, and so forth. The customer ought to likewise endeavor to learn however much as could be expected about the speculation administrator's venture reasoning, practices and systems.

Dialog and understanding: All the issues identified with what is to occur among customer and counselor ought to be put on the table. Where there are questions or an absence of clearness exists, further talk might be required. In the long run the customer and consultants need to come to concurrence on issues, for example, the level of customer contribution, the benefit portion to be utilized, the sorts of instruments to be used (or not), how charge contemplations will be dealt with, venture objectives, requirements for liquidity or pay, speculation confinements, speculation philosophy, and duties of each gathering to the next.

Making the IPS: Once the understandings have been come to on the full rundown of issues and strategies to be pursued, they should be recorded. This archive will turn into the IPS. The client(s) and the counselor sign the record, connoting each gathering's affirmation of the understandings.

Investment execution: Until there is understanding between the consultant and customer about the strategies to be pursued, no speculation exchanges can mindfully occur. When the IPS hosts been marked by all gatherings, the underlying and progressing exchanges can be executed by the guide gave by the IPS.

Answer b)

Modern Portfolio Theory is Markowitz's hypothesis with respect to amplifying the arrival financial specialists could get in their speculation portfolio considering the hazard engaged with the ventures. MPT requests that the financial specialist think about how much the danger of one venture can affect their whole portfolio.

Markowitz expected that most financial specialists are chance unwilling. That implies they are all the more by and by OK with less hazard, and apprehensive and on edge with expanded hazard. This likewise converts into the conviction that it is smarter to not lose cash than to discover or pick up it.

financial specialists can develop portfolios to upgrade or augment expected profit based for a given degree of market chance, underlining that hazard is a natural piece of higher reward. As per the hypothesis, it's conceivable to build a "proficient boondocks" of ideal portfolios offering the most extreme conceivable anticipated return for a given degree of risk.

Answer c)

In fund, diversification is the way toward allotting capital in a manner that decreases the introduction to any one specific resource or hazard. A typical way towards enhancement is to diminish hazard or unpredictability by putting resources into an assortment of advantages.

Expansion is a method that diminishes chance by allotting ventures among different budgetary instruments, enterprises, and different classifications. It intends to augment returns by putting resources into various regions that would each respond distinctively to a similar occasion.

Most speculation experts concur that, despite the fact that it doesn't ensure against misfortune, enhancement is the most significant part of arriving at long-go money related objectives while limiting danger. Here, we take a gander at why this is valid and how to achieve enhancement in your portfolio.

The Zambian Stock Exchange, began business on February 21st 1994.the LUSE has figured out how to expand money related instruments available with values, unit trusts, government and corporate securities.

Zambia's future improvement will depend, in significant part, on enhancement of the economy, growing new zones of creation and fare. The best prospects for enhancement are inside the farming part. Generally, Zambia's farming division has been ruled by maize developing. Be that as it may, there is significant potential for extension in regard of various horticultural items.