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Q.1. In Portfolio construction three issues are addressed – selectivity, timing and
diversification.Explain.
Ans.
Portfolio Construction-
In today's financial marketplace, a well-maintained
portfolio is vital to any investor's success. As an individual investor, you need to know
how to determine an asset allocation that best conforms to your personal investment
goals and strategies. In other words, your portfolio should meet your future needs for
capital and give you peace of mind.
This step concludes with the asset allocation decision: identification of the potential
categories of financial assets for consideration in the portfolio that the investor is going
to construct. Asset allocation involves dividing an investment portfolio among different
asset categories, such as stocks, bonds and cash. The asset allocation the works best for
investors at any given point in his life depends largely on his horizon and his ability to
tolerate risk.
Time Horizon: - Time horizon is the expected number of months, years, or decades that
investors will be investing his money to achieve a particular financial goal. An investor
with a longer time horizon may feel more comfortable with a riskier or more volatile
investing because he can ride out the slow economic cycle and the inevitable ups and
downs of the markets. By contrast, investors who are saving for his teen-aged daughter’s
college education would be less likely to take a large risk because he has a shorter time
horizon.
Diversification: - Diversification aims at constructing a portfolio in such a way that the
investor’s risk is minimized.
Q.2. Briefly explain money market instrument bringing in the latest updates.
Ans. The money market exists as a result of the interaction between the suppliers and
demanders of short terms funds. Most money market transactions are made in
marketable securities which are short-term debt instrument such as T-bills and
commercial paper. The term “money market” is a moisnpomer. Money is not actually
traded in the bmoney markets. The securities traded in the money market are short
term with high liquidity and low risk; therefore they are close to being money.
Money market provides investors a place for parking surplus funds for short periods
of time. It also provides low-cost source of temporary funds to borrowers like firms,
government and financial intermediates. Money market transactions can be executed
directly or through an intermediary. Investors in money market instruments include
corporations and Fls who idle cash but are restricted to a short term investment
horizon. The money markets essentially serve to allocate the nation’s supply of liquid
funds among major short term lenders and borrowers.
Characteristics of Money Market Instruments -
The characteristics of money market instruments are:
➢ Short term debt instruments (maturity of less than 1 year)
➢ Services immediate cash needs
➢ Instruments trade in an active secondary market
➢ Large denominations
➢ Low default risk
➢ Insentient to interest rate changes
Common money market instruments
• Certificate of deposit - Time deposits, commonly offered to consumers by banks,
thrift institutions, and credit unions.
• Money funds - Pooled short maturity, high quality investments which buy money
market securities on behalf of retail or institutional investors.
• Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the
reversal of the exchange of currencies at a predetermined time in the future.