Investment Strategy

Investment Strategy

To maximize optimum performance of our investment portfolio, we placed a certain percentage of equity in different sectors of the stock market.

To maximize value with a bearish market, we structured an initial investment strategy that focused on inputting funds into income assets in the form of t-bills and bonds. Roughly, we estimated on contributing between twenty and thirty percent into these low risk funds until the market index increased. Once the stock market indices picked up, the majority of our one million dollars in assets was to be places in Canadian and United States equities. The remainder of cash was to be used in derivative instruments to increase potential earnings while keeping the portfolio risk diversified.

Execution

The execution of our investment strategy occurred in three stages. First, we invested in t-bills and bonds according to our original set out investment plan. This was to decrease potential losses and risk associated with the declining equity market. Therefore, we invested about two hundred thousand of our funds into these low risk assets to maintain buying power. Due to inflation, we did not want to lose buying power by leaving funds in an account without earning interest. Further, we invested a small portion of funds into the commodity market. With a slumping equity market and a positive outlook on the gold commodity, we invested in Gold Corporation at the same time we invested in income assets.

We analyzed the market for two weeks to determine when the equity market would turn from a bearish to bullish market. Without a change in the market and a declining bond price, we decided to invest in equities according to our investment strategy, which brought us into the second phase of our portfolio. Therefore, at the beginning of February we bought shares in Sirius, Microsoft, Neon, Washington Mutual, and Nike. As assumed, the equity market continued to plummet decreasing the value of all our stocks except for our Gold Corporation stock.

Finally, the third phase is where we profited from our investments. Having performed poorly in the equity market, we developed a new strategy of investing. This strategy focused more on the commodity sector rather then the equity sector. Therefore, at the beginning of March we bought contracts in gold, corn, platinum, lumber, and the United States currency. As equities dropped, the prices of commodities increased allowing our lumber, corn, and platinum to make huge gains. This boosted our portfolio’s performance, increasing capital and the potential for higher returns.

Analysis/Evaluation

In analyzing our investment portfolio, there are various reasons for the positive expected return.

Due to a devaluation of the American dollar, the TSX composite index, DOW Jones, and any equity market associated with America took a toll on their indexes. Therefore, this led us to believe that we should invest in bond and t-bills otherwise known as low risk income assets. Our analysis as shown in graph 1 concluded that as the expected interest rate in a domestic economy decrease, the price level of a bond increases, increasing the potential value of a bond if sold according to economic theory. With an expected federal government meeting concerning slashing interest rates to it seemed almost certain that bonds would react positively. An interest rate slash will discourage saving and encourage investing and borrowing. Further, our team did not take into account the sub-prime issue in the United States. It was a factor that outweighed the interest rate cut. Investor’s expectations were still very weary towards the future of the United States therefore keeping the price of bonds low creating a loss on our bond values. Economic theory also shows that as interest rates are slashed there is a secondary effect. Because it is easier for borrowers to obtain funds, the supply of bonds increases as well, offsetting the interest rate adjustment. Therefore, in the long-run interest rates actually increase, keeping consumers expectations the same. A federal interest rate slash is only a possible short-term solution to try and boost the economy. Rational investors take into account the long-term affects, therefore not reacting to the interest cut in the equity market. Secondly, the commission charges on the bonds out numbered charges on regular equity stocks ten to one, further decreasing our profits. As a result, in the middle of February we sold our bonds and took the losses.

Our investment team began to focus more on the stock market at the beginning of February. We invested in Nike, Sirius, Microsoft, Neon, and Washington Mutual. However, due to the state of the American economy the retail industry