Return Objectives - Paper Example

Introduction

The return objective of investment opportunities differs on various occasions. The return objectives for multiple combinations of investment portfolio depending on the need to engage or undertake such investments or projects. Capital income and realizing a profitable return on investment are the core factors that call for the idea of undertaking various projects or investments in business. Similarly, capital appreciation is an additional factor that drives the need for engaging in investment opportunities. In a financial situation, for instance, when evaluating a combination of multiple portfolios of investment options, capital appreciation is always the critical aspect considered when identifying the return objective.

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Among the multiple investment options, in this case, the most appropriate investment in the combined portfolio that will meet my interest when I invest the sum totalling to $25,000, is the option that will raise the original amount invested. Retaining this amount without investing in any project through saving plans will not be of value. Therefore, appreciation of invested capital in a combination of a portfolio of assets will integrate the growth of the project. However, capital appreciation can only be achieved when the return objective of the investment option surpasses the expected returns. Similarly, I will have to focus on the evaluation of the expected rate of returns to determine whether the invested capital will grow.

Input Efforts

Business or individuals, in most cases, focus on growing the income realized from the input efforts in a project. This adds to the core aspect of growing capital invested; capital appreciation. Returns are always recorded in the proportion of the invested capital (Thomas, 2020). Income is the earned finances which help investors in daily operation and funding of expenditures. Therefore, it will be significant to ensure that the invested capital attributes to measures steered towards generating income, which will motivate the investor's interests in undertaking a project and employing efforts. These can only be supported with good total returns which depend in considerable growth in the capital base. From the above elaboration, an investment or return objective is what the business or investor wants to achieve from a given combination of the portfolio (Thomas, 2020). From the provided portfolio, in this case, I would invest in the funds with a payback period of 3 to 5 years in the long run. This is steered by my urge to realize higher returns from the portfolio. I am geared to run a diversified portfolio and effectively balanced to realize higher returns. From the payback periods of the funds and investment options, I am obliged to develop the expected returns on investment from each. The aspects mentioned above sums up my return objectives in the combined portfolio in this case.

Risk Tolerance

A clear definition of risk tolerance is determined by an individual's, or business's motive to invest in a combination of a portfolio of assets. Individuals and businesses usually have various reasons for choosing to invest in a combined portfolio of assets. In most cases, investors usually have a significant reason to undertake investment operations in a combined portfolio of assets. Earned funds can represent growth in business or individual operations within a financial income year compared to previous years. Businesses usually ensure they achieve their success strategies by upholding capital appreciation and income increasing strategies. This adds to the core strategy geared towards improving operating income and invested capital. To achieve both aspects at once in a situation involving a combination of portfolios, businesses have to forgo a proportion of the current income to initiate long-term business growth, thereby involving risk tolerance.

There are various aspects of risk tolerance. Risk tolerance is of three aspects; conservative, aggressive, and moderate (Nguyen et al., 2016). However, businesses usually focus on the risk tolerance alternative that suits the investment objective best. Aggressive risk tolerance is the risk tolerance aspect that ensures that the investor realizes an exemplary growth on the invested capital with a considerable capital ploughed into the investment (Nguyen et al., 2016). An aggressive risk tolerance option is always chosen based on the investment objectives, which is to realize a significant growth on the capital investment and net income (Nguyen et al., 2016). Such an initiative of risk tolerance depicts that the individual or firm is steered to boost its income in the long-run. Considering the aspects of risk tolerance highlighted above, I am risk-averse and therefore, will undertake the investment with higher returns despite the high risk associated with it. It is always necessary that if an investor expects to realize an above-average return on investment, he/she has to counter risks since, without risks, no reasonable gain will be realized.

Portfolio and Allocation of Assets

The achieved assets for the investment initiative are the four US equity mutual funds consisting of investment grade bond fund, a large capitalization NON-US fund, small capitalization US fund, US large capitalization focused fund, and S&P 500 index. All these investment fund initiatives effectively track the benchmark. Considering the expected returns, and the payback periods of the four US mutual funds, I will invest in bonds that will meet my return objective and risk tolerance factors. The focus rests on the investment with higher returns and growing the invested capital in the long run. I will, therefore focus on funds 2, 4, and 5. The first two years should raise the invested capital. The subsequent two years focus on the growth of the net income, while the last payback period focuses on total returns on investment of the selected investment.

Fund 2 provides higher returns in the first and last five years. My return objective focuses on the long-term returns, and five years is viable; therefore, this justifies my decision to invest in this. Fund 4 provides the highest returns on capital invested in 1 year; therefore, I will select this investment option since it suits my short term payback return on the investment objective. Fund 5 provides good expected returns in the first, third, and fifth years. Therefore, I will invest in this fund due to its consistent returns with a less expense ratio. The allocation depicted above represents my portfolio in the investment in the funds.

Portfolio Diversification

Individuals and businesses should diversify their savings through multiple investments to disperse the risks associated than investing in one asset, fund, or security. Portfolio diversification is of various benefits, including risk minimization and above-average returns on investment (Viceira and Wang, 2018). Therefore, this justifies my choice for multiple funds 2, 4, and 5, in this case.

Risk Factor and Duration

The risk factor aspect holds that if an investor is ready to undertake an investment with high associated risk, he/she is guaranteed higher returns on investment. Duration plays a significant role when evaluating investment alternatives. Investments with longer payback periods of more than five years give higher returns on investment (Loginovskiy, 2016). Therefore, considering the aspects mentioned above, I decided to invest in funds 2, 4 and with longer payback period.

Efficient Market Hypothesis

EMH is an investment hypothesis that holds that it is challenging to beat the market due to the existing offer prices caused by the stock market efficiency. Considering the EMH, stocks are generally exchanged at their incentive, making it unbelievable for financial analysts to buy underestimated stocks or sell them at inflated costs (Loredana, 2019). Therefore, determination of market stock and market timing are not effective strategies to beat the market, and obtaining riskier investments remains the only way speculators can get more significant yields (Loredana, 2019). Considering all the above, I decided to invest in funds 2,4 and 5 due to the associated risks and high expected returns.

Abnormal Return

An abnormal return refers to the returns generated by a portfolio or single investment over a given period that is not imaginable and comparable to the average expected return rate. A standard return rate on an investment is the assumed period an investment is expected to have generated a particular amount of returns. In this case, funds 2,4 and 5 have their expected returns corresponding to various payback periods, and in case of difference in returns, then an abnormal return is noted.

Conclusion

Managing a portfolio of investments takes into account more than just ensuring the funds meet their expected returns. I will aim to invest in conservative stocks with regular dividends, growth potential in the long-run, and better returns despite the high-risk potential. I will desist from investing in individual stocks and opt to invest in a combination of portfolios. If my portfolio outperforms my benchmark, I will invest more of funds in the projects, since they have the potential of paying back the capital invested. However, if my portfolio underperforms my benchmark, I will opt for other investment alternatives, and abandon those without the potential to raise the expected returns. Success is only defined if an investment meets the expected returns on capital. Therefore, I will define success if my portfolio meets my returns objectives.

References

Loginovskiy, O. V. (2016). Use of an investment payback period in Order to Analyze project effectiveness. Vestnik Yuzno-Uralskogo gosudarstvennogo universiteta. Seriya: Kompyuterny'e texnologii, upravlenie, radioe'lektronika, 16(4).
https://cyberleninka.ru/article/n/16929226

Loredana, M. E. (2019). A CRITICAL THEORETICAL ANALYSIS ON THE IMPLICATIONS OF EFFICIENT MARKET HYPOTHESIS (EMH). Annals of'Constantin Brancusi'University of Targu-Jiu. Economy Series, (6). http://www.utgjiu.ro/revista/ec/pdf/2019-06/43_Minea.pdf

Nguyen, L., Gallery, G., & Newton, C. (2016). The influence of financial risk tolerance on investment decision-making in a financial advice context. Australasian Accounting, Business and Finance Journal, 10(3), 3-22. http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1704&context=aabfj

Thomas, B. J.(2020) Investment Objectives of Mutual Fund Investors. https://www.academia.edu/download/64326235/14%20Investment%20Obj.pdf

Viceira, L. M., & Wang, Z. K. (2018). Global portfolio diversification for long-horizon investors (No. w24646). National Bureau of Economic Research.
https://www.nber.org/papers/w24646.pdf.