Investment Strategy Case Problem

Chapter 11 Case Problem 1: Investment Strategy

J.D. Williams, Inc., is an investment advisory firm that manages more than $120 million in funds for its numerous clients. The company uses an asset allocation model that recommends the portion of each client’s portfolio to be invested in a growth stock fund, an income fund, and a money market fund. To maintain diversity in each client’s portfolio, the firm places limits on the percentage of each portfolio that may be invested in each of the three funds.

General guidelines indicate that the amount invested in the growth fund must be between 20% and 40% of the total portfolio value. Similar percentages for the other two funds stipulate that between 20% and 50% of the total portfolio must be in the income fund, and at least 30% of the total portfolio value must be in the money market fund.

In addition, the company attempts to assess the risk tolerance of each client and adjust the portfolio to meet the needs pf the individual investor. For example, Williams just contracted with a new client who has $800,000 to invest. Based on an evaluation of the client’s risk tolerance, Williams assigned a maximum risk index of 0.05 for the client.

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The firm’s risk indicators show the risk of the growth fund at 0.10, the income fund at 0.07, and the money market fund at 0.01. An overall portfolio risk index is computed as a weighted average of the risk rating for the three funds where the weights are the fraction of the client’s portfolio invested in each of the funds.

Additionally, Williams is currently forecasting annual yields of 18% for the growth fund, 12.5% for the income fund, and 7.5% for the money market fund. Based on the information provided, how should the new client be advised to allocate the $800,000 among the growth, income, and money market funds? Develop a linear programming model that will provide the maximum yield for the portfolio. Use your model to develop a managerial report.

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Managerial Report

1) Recommend how much of the $800,000 should be invested in each of the three funds. What is the annual yield you anticipate for the investment recommendation?

2) Assume that the client’s risk index could be increased to 0.055. How much would the yield increase and how would the investment recommendation change?

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3) Refer again to the original situation where the client’s risk index was assessed to be 0.05. How would your investment change if the annual yield for the growth fund were revised downward to 16%? How would your investment change if the annual yield for the growth fund were revised downward to 14%?

4) Assume that the client expressed some concern about having too much money in the growth fund. How would the recommendation change if the amount invested in the growth fund is not allowed to exceed the amount invested in the income fund?

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5) The asset allocation model you developed may be useful in modifying the portfolios for all of the firm’s clients whenever the anticipated yields for the three funds are periodically revised. What is your recommendation as to whether use of this model is possible? Support your answer using the results you obtained from question 2, 3, and 4. Perform sensitivity analysis of the optimal solution. Questions #2, #3, and #4 of the Case Problem each consider alternatives to the original problem. Respond to each of these questions with a short analysis of the differences and the implications of these differences in terms of the problem statement. For which of these does the solution change? Include Excel outputs to support answers.

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1. Do not repeat in summary form large pieces of factual information from the case. The instructor has read the case and knows what is going on. Rather, use the information in the case to illustrate your statements, to defend your arguments, or to make salient points. Beyond the brief introduction to the company, you must avoid being descriptive; instead, you must be analytical.

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2. Make sure the sections and subsections of your discussion flow logically and smoothly from one to the next. That is, try to build on what has gone before so that the analysis of the case study moves toward a climax. This is particularly important for group analysis, because there is a tendency for people in a group to split up the work and say, “I’ll do the beginning, you take the middle, and I’ll do the end.” The result is a choppy, stilted analysis because the parts do not flow from one to the next, and it is obvious to the instructor that no real group work has been done.

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3. Avoid grammatical and spelling errors. They make the paper sloppy.

4. In some instances, cases dealing with well-known companies don’t include up-to-date research because it was not available at the time the case was written. If possible, do a search for more information on what has happened to the company in subsequent years. Following are sources of information for performing this search:

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The World Wide Web is the place to start your research. Very often you can download copies of a company’s annual report from its Web site, and many companies also keep lists of press releases and articles that have been written about them. Thoroughly search the company’s Web site for information such as the company’s history and performance, and download all relevant information at the beginning of your project.

Standard & Poor’s industry reports provide detailed information about the competitive conditions facing the company’s industry. Be sure to look at this journal.

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5. Sometimes instructors hand out questions for each case to help you in your analysis. Use these as a guide for writing the case analysis. They often illuminate the important issues that have to be covered in the discussion. you look for websites that write papers for you for free .

If you follow the guidelines in this section, you should be able to write a thorough and effective evaluation.

Lessons Learned

This week, you will work on the Investment Strategy Case problem on page 587 of your text. Keep in mind the structure of your written report as it is critical. All reports begin with an introduction to the case. In it you outline briefly what the company does, how it developed historically, what problems it is experiencing, and how you are going to approach the issues addressing the questions at the end of the case.

Do this sequentially by writing, for example, “First, we discuss the environment of Company X…Third, we discuss Company X’s business-level strategy… Last, we provide recommendations for turning around Company X’s business.”

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Make sure you use plenty of headings and subheadings to structure your analysis. For example, have separate sections on any important conceptual tool you use. Thus, you might have a section on Porter’s five forces model as part of your analysis of the environment. You might offer a separate section on portfolio techniques when analyzing a company’s corporate strategy. Tailor the sections and subsections to the specific issues of importance in the case.

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In the third part of the case write-up, present your solutions and recommendations. Be comprehensive, and make sure they are in line with the previous analysis so that the recommendations fit together and move logically from one to the next. The recommendations section is very revealing because it shows how much work you put into the case from the quality of your recommendations.

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Your paper is to be written in 6th edition APA formatting, and should be no less than 5 pages in length (excluding cover and reference page). Also, you should use at least 2 academic references to support your analysis and critical thinking in your summary essay example.

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