Presbyterian University of East Africa

Unit title: Investment and portfolio management

Unit code: Abs 420

Lecturer: Madam Phanice Ambutsi

Due date: 22/7/2023

Task: Assignment

Group members:

Mbee Beatrice X35/GV/10849/2021

Brenda Chemutsi X35/GV/10906/2021

Nasreen chepkoech X35/GV/10910/2021

Assume that you plan to create a portfolio aimed at achieving your stated objectives. The
portfolio will be constructed by allocating your money between Ksh.4, 000,000 to Ksh.
5,000,000 to the various traditional investment and alternative forms of investment

Introduction:

Creating a well-diversified investment portfolio is essential for achieving financial objectives and
managing risk. As an investor with a capital range of Ksh. 4,000,000 to Ksh. 5,000,000, the goal
is to build a balanced portfolio that balances potential returns with risk tolerance. In this
portfolio, we will explore a mix of traditional investments, such as stocks and bonds, along with
some alternative forms of investments to enhance diversification and potentially increase
returns.

Describe your detailed investment policy in terms of investment objectives and constraints

Investment Policy Statement

The primary objective of my investment portfolio is to achieve long-term capital appreciation

while managing risk to preserve capital. The target investment amount is between Ksh.
4,000,000 to Ksh. 5,000,000. The portfolio will be diversified across various traditional and
alternative investment instruments to create a balanced approach to wealth creation.The
portfolio aims to outperform the benchmark index over a specified investment horizon.

Investment Objectives:

Capital Appreciation

The key aspect of capital appreciation is the emphasis of long-term growth.As an investor with
a portfolio ranging from Ksh. 4,000,000 to Ksh. 5,000,000, my primary goal is to seek
opportunities that have the potential to deliver substantial gains in the value of my
investments.Rather than seeking immediate income through dividends or interest payments, I
aim to benefit from the appreciation of the underlying assets.

Risk Management

As an investor with the objective of risk management, my goal is to minimize the potential
negative impact of investment losses while seeking reasonable returns. Risk management
involves a set of strategies and techniques employed to identify, assess, and mitigate risks
associated with my investment portfolio. This idea is to strike a balance between generating
returns and safeguarding my capital against market fluctuations and uncertainties.
By implementing risk management strategies, I can work towards achieving my investment
objective of minimizing risk while pursuing reasonable returns within the allocated amount of
Ksh. 4,000,000 to Ksh. 5,000,000.

Income Generation

I will generate a regular income stream through dividend-paying investments, fixed-income

instruments, or other income-generating assets.Income generation, as an investment objective,
is focused on generating a steady stream of income from my investments. My goal is to receive
regular and predictable returns in the form of interest, dividends, rental income, or other
sources of income.

Investment Constraints:

Investment Horizon

As an investment constraint, the investment horizon will influence the selection of assets in the
portfolio and the allocation of funds among them. It serves as a guide to determine which types
of investments are suitable for your objectives and risk tolerance.The investment horizon for
this portfolio is long-term, typically 5-10 years or more. If the investment horizon extends
beyond five years, I can afford to take on more risk in pursuit of higher potential returns. This
could involve a larger allocation to equities (both domestic and international), growth-oriented
mutual funds, and even some exposure to alternative investments such as real estate
investment trusts (REITs), venture capital funds, or commodities. While these assets carry
higher risk in the short term, they historically have the potential for significant growth over
more extended periods.

Risk Tolerance:

As an investment constraint, risk tolerance plays a crucial role in determining the composition
of my investment portfolio. It helps strike a balance between the potential for higher returns
and the risk of potential losses. Different investment options carry varying levels of risk.Iam a
risk averse investor therefore I have a low risk tolerance, I prioritize preserving my capital and
Iam uncomfortable with significant fluctuations in the value of my investments. I prefer more
conservative and stable investments, such as government bonds, blue-chip stocks, or low-risk
mutual funds. While this approach may lead to more modest returns, it provides a higher level
of security.

3.Liquidity Needs

Liquidity needs is the demand for cash or cash-equivalent assets to meet immediate financial
obligations or unforeseen expenses without incurring significant costs or losses.To address
liquidity needs as an investment constraint, I should allocate a portion of my portfolio to highly
liquid assets. These are assets that can be easily converted into cash without price fluctuations.
eg cash, money market funds, short-term government bonds, and highly traded stocks.

Regulatory and Legal Constraints

As an investor, I will encounter regulatory and legal constraints that may affect ability to
allocate my money and invest in certain assets or investment vehicles. These constraints are
put in place by governments and regulatory bodies to protect investors, maintain market
integrity, and ensure fair practices. The portfolio will comply with all applicable laws,
regulations, and guidelines governing investments.

5.Time and Effort Constraints

As an investor, the time and effort constraint refers to the limitations I have in terms of the
time and effort I can allocate to managing and monitoring my investment portfolio. This
constraint is crucial because managing investments effectively requires ongoing attention,
research, and decision-making. However, as an individual, I may have other responsibilities,
commitments, or limitations that impact the amount of time and effort I can dedicate to my
investments. Let us explore this constrain in detail.

Time Constraint: As an individual with other personal and professional commitments, my time
is limited. I may not have the capacity to actively monitor the financial markets, conduct in-
depth research on individual investment opportunities, or make frequent adjustments to my
portfolio. Therefore, I need to consider investment options that are relatively low maintenance
and do not demand constant attention.

Effort Constraint: The effort constraint is closely related to the time constraint. While I may be
willing to dedicate some effort to managing my portfolio, there is a limit to how much research,
analysis, and decision-making I can handle on an ongoing basis. Complex investment strategies
or assets that require significant effort to understand and manage may not be suitable for me
given this constraint.

By choosing investment options that align with my time and effort constraints, I can build a
balanced portfolio that requires less active management while still working towards my stated
objectives.

Portfolio Monitoring and Review:

The portfolio will be regularly monitored to ensure it remains aligned with the investment
objectives and constraints. Performance will be evaluated against the benchmark index, and
rebalancing will be conducted periodically to maintain the target asset allocation.

Describe the types of companies (specify using the names of listed and actively trading
companies on stock exchanges: NSE and NYSE) indicating specific securities you would invest
in. (this should include financial analysis of the chosen companies using key financial ratios).
(10 marks

There are various companies that are listed in NSE and NYSE.Different companies offer different
services like banking,etc.There are several companies the investor is likely to invest in which
includes:-ABSA bank , safaricom company limited,East Africa breweries,CIC insurance group and
Johnson and Johnson company

ABSA bank.(NSE)

ABSA Bank is a South African financial institution that provides a wide range of banking and
financial services.There are several securities traded in ABSA bank in the NSE stock exchange:-

Stocks: Banks often facilitate the trading of stocks on various stock exchanges. These stocks
represent ownership in publicly traded companies and can be bought and sold through
brokerage accounts.

Bonds: Banks may also trade bonds, which are debt securities issued by governments,
municipalities, and corporations. Bonds represent a loan to the issuer, and investors earn
interest on the principal amount over a specified period.

Exchange-Traded Funds (ETFs): ETFs are investment funds traded on stock exchanges. They aim
to track the performance of a specific index, sector, commodity, or asset class. ETFs provide
diversification and can be bought and sold like stocks.

Mutual Funds: Banks often offer mutual funds, which are investment vehicles that pool money
from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities.

Derivatives: Banks may facilitate the trading of derivatives, such as options and futures
contracts. These financial instruments derive their value from an underlying asset and are often
used for hedging or speculative purposes.

Below is some financial analysis of ABSA bank.

P/E Ratio (TTM) 4.14

P/E Ratio (including extraordinary items 4.14

Price to Sales Ratio 1.23

Price to Cash Flow Ratio 2.64

Enterprise Value to EBITDA 6.08

Enterprise Value to Sales 2.21

Total Debt to Enterprise Value 0.68

Total Debt to EBITDA _

EPS (recurring) 2.69

EPS (basic) 2.69

EPS (diluted) 2.69

Efficiency

Revenue/Employee _

Income Per Employee _

Receivables Turnover _

Total Asset Turnover 0.12

Liquidity

Current Ratio 0.27

Quick Ratio -

Cash Ratio -

Profitability

Gross Margin -

Operating Margin +38.27

Pretax Margin +38.27

Net Margin +26.78

Return on Assets 3.22

Return on Equity 24.30

Return on Total Capital 18.53

Return on Invested Capital 19.40

Capital Structure

Total Debt to Total Equity 142.52

Total Debt to Total Capital 58.77

Total Debt to Total Assets 18.98

Interest Coverage

Long-Term Debt to Equity 32.77

Long-Term Debt to Total Capital 13.51

Long-Term Debt to Assets 0.04

East Africa breweries(NSE)

The securities traded by East African Breweries Limited on the NSE include:

Common Stock: Common stock represents ownership in the company and gives shareholders
the right to vote at the company's annual general meetings and receive dividends, if declared.

Preference Shares: Preference shares are a class of shares that typically come with fixed
dividend payments and have a higher claim on company assets and earnings than common
stock. However, preference shareholders usually do not have voting rights.

East Africa breweries financial analysis:-

P/E Ratio (TTM) 8.33

P/E Ratio (including extraordinary items) 8.36

Price to Sales Ratio 0.99

Price to Book Ratio 6.66

Price to Cash Flow Ratio 4.17

Enterprise Value to EBITDA 4.84

Enterprise Value to Sales 1.48

Total Debt to Enterprise Value 0.29

Total Debt to EBITDA 1.32

EPS (recurring) 15.35

EPS (basic) 15.06

EPS (diluted) 15.06

Efficiency

Revenue/Employee _

Income Per Employee _

Receivables Turnover 8.43

Total Asset Turnover 1.04

Liquidity

Current Ratio 0.85

Quick Ratio 0.53

Cash Ratio 0.24

Profitability

Gross Margin +47.32

Operating Margin +25.78

Pretax Margin +21.95

Net Margin +10.84

Return on Assets 11.26

Return on Equity 105.87

Return on Total Capital 42.04

Return on Invested Capital 24.23

Capital Structure

Total Debt to Total Equity 278.21

Total Debt to Total Capital 73.56

Total Debt to Total Assets 40.85

Interest Coverage 6.38

Long-Term Debt to Equity 223.03

Long-Term Debt to Total Capital 58.97

Long-Term Debt to Assets 0.33

Johnson and Johnson company limited(NYSE)

The securities traded by Johnson & Johnson on the NYSE include:

Common Stock: Common stock represents ownership in the company and gives shareholders
voting rights at the company's annual general meetings. Shareholders may also receive
dividends, if declared.

Preferred Stock: Preferred stock is a class of shares that typically come with fixed dividend
payments and have a higher claim on company assets and earnings than common stock.
Preferred shareholders usually do not have voting rights.

Johnson and Johnson financial analysis

Current Ratio 0.9909

Long term debt/capital 0.2593

Debt/equity ratio 0.5164

Gross margin 67.2551

Operating Margin 22.8822

EBIT margin 23.689

EBITDA margin 31.0302

Pre-tax margin 22.8822

Net profit margin 18.8966

Asset Turnover 0.5067

Inventory turnover ratio 2.4905

Receivables Turnover Ratio 5.8752

Day sale in receivables 62.1257

ROE-return on Equity 23.3595

Return on tangible equity -107.0977

ROA-return on assets 9.5748

ROI-return on investment 17.3022

Book value per share 29.3863

Operating cash flow per share -0.7987

Free cash flow per share -0.9999

CIC Insurance Group(NSE)

CIC Insurance Group is a leading insurance company in Kenya that offers a wide range of
insurance products and services. Some of the securities that may have been traded for the
company include:
Equity Shares: These represent ownership in the company. By purchasing CIC Insurance
Group's equity shares, investors become partial owners of the company and may be entitled to
a share of profits in the form of dividends.

Bonds: Companies can issue bonds to raise capital. Bondholders lend money to the company
and, in return, receive periodic interest payments and the face value of the bond upon
maturity.

Preference Shares: Preference shares give their holders priority over common shareholders in
terms of dividend payments and, in the event of liquidation, they have a higher claim on the
company's assets.

Debentures: Debentures are similar to bonds, but they are not secured by specific assets.
Debenture holders are creditors of the company and are entitled to regular interest payments.

Rights Issues: A rights issue allows existing shareholders to buy additional shares at a
discounted price, enabling the company to raise capital from its current shareholders.

Convertible Securities: These are securities that can be converted into another type of security,
usually common shares, at a predetermined price and within a specific time frame.

Warrants: Warrants are like options, giving the holder the right to buy CIC Insurance Group's
shares at a fixed price for a specified period.

Exchange-Traded Funds (ETFs): While CIC Insurance Group itself may not issue ETFs, investors
can trade ETFs that include CIC's shares among their underlying assets.

Derivatives: Various types of derivatives, such as futures and options, may be available for
trading based on CIC Insurance Group's securities.

CIC Insurance Group Financial analysis

P/E Ratio (TTM) 4.81

P/E Ratio (including extraordinary items) 4.76

Price to sales Ratio 0.23

Price to book Ratio 0.60

Price to cash flow ratio 10.18

Enterprise value to EBITDA 2.84

Enterprise value to sales 0.28

Total debt to Enterprise value 0.49

Total debt to EBITDA -

EPS ( recurring) 0.33

EPS ( basic) 0.40

EPS ( diluted) 0.40

Revenue/Employee 34,045,127

Income per employee 1,632,613

Receivables Turnover -

Total Asset Turnover 0.53

Current Ratio 0.72

Quick Ratio -

Cash Ratio -

Gross margin -

Operating margin +0.95

Pretax margin +9.16

Net margin +4.80

Return on assets 2.52

Return on equity 12.81

Return on Total capital 15.41

Return on invested capital 12.48

Total debt to Total equity 56.53

Total debt to Total capital 36.12

Total debt to Total Assets 10.90

Long-term debt to equity 3.08

Long-term debt to Total capital 1.97

Long term debt to Assets 0.01

safaricom company (NSE)

Safaricom Limited is a telecommunications company based in Kenya and is one of the largest
publicly traded companies on the Nairobi Securities Exchange (NSE).Safaricom's securities
traded on the NSE include:

Ordinary shares

These are the most common type of securities traded on the NSE and represent ownership in
Safaricom. Each share represents a portion of ownership in the company, and shareholders are
entitled to a portion of the company's profits in the form of dividend

Preference shares

Preference shares are a type of stock that entitles their holders to receive dividends before
ordinary shareholders in the event of a distribution of profits. They usually have a fixed
dividend rate, providing a more stable income stream but typically do not carry voting rights.

Bonds

Safaricom may issue bonds to raise capital. Bonds are debt securities where investors lend
money to the company in exchange for periodic interest payments and the repayment of the
principal amount at maturity.

These are bonds issued by Safaricom as a means of raising funds for various projects or
operations. Investors who purchase these bonds are essentially lending money to Safaricom for
a fixed period, and in return, they receive periodic interest payments until the bond reaches its
maturity date.

Commercial paper
Safaricom may issue commercial paper, which is a short-term debt instrument used to fund the
company's short-term financial needs. It typically has a maturity of less than one year and is
often used to cover immediate operational expenses.

Safaricom financial analysis

Valuation

P/E(TTM) 11.68

P/E ratio

Price to sales ratios

Price to book ratio

Price to cash flow ratio

Enterprise value to EBITDA 5.45

Enterprise value to sales 2.48

Total debt to enterprise value -

Total debt to EBITDA 0.35

Eps(recurring) -

Eps (basic) 1.55

Eps(diluted) 1.55

Efficiency

Revenue -

Income per employee -

Receivable Turnover 8.77

Total asset turnover 0.71

Liquidity

Current ratio 0.52

Quick ratio 0.49

Cash ratio 0.16

Profitability

Gross margin 52.11

Operating margin 27.67

Pretax margin 28.78

Net margin 20.27

Return on asset 14.46

Return on equity 38.08

Return on Total capital 29.45

Return on invested -

Capital structure

Total debt to total Equity 26.04

Total debt to total capital 20.66

Total debt to total asset 9.59

Interest coverage 11.99

Long term debt equity -

Long term debt to total capital -

Long term debt to asset -

Determine and justify funds allocation(it could be 20percent or any percentage allocated to
either asset) to various investment vehicles identified in (ii) in light of your stated portfolio
objectives and constraints.

Determining the funds allocation needs evaluation and the analysis of different investment
vehicles for example equity, bonds,real estate and preference shares and also to justify the
allocation based on their characteristics, risk return profile and the suitability for the portfolio
objectives and constrains

Project Amount Percentage

Equity 2000000 50

Bonds 1200000 30

Real estate 600000 15

Preference 200000 5

Total 4000000 100

Justification and allocation

Equity

Allocating a portion of the portfolio to equity can provide the potential for the long term
capital appreciation. Considering the investor risk tolerance and the market condition we
allocate 50 percent of ksh 4000,000 to equity.

Bonds

Bonds offer fixed income and can provide stability to the portfolio. Allocating 30 percent of
4000,000 to bonds can generate regular income that helps in managing the risk.

Real estate

By allocating 15 percent of 4000,000 to real estate investment can provide divesification,

potential appreciation.

Preference shares
Allocating 5 percent of 4000000 in preference shares helps in coming up with fixed dividend
payment.

Construct a diversified portfolio. Consider covariance and correlection among the asset
forming the portfolio. Diversified portfolio has securities between 15 and 20.

Constructing a diversified portfolio involves selecting a mix of assets that have low correlations
with each other, which helps to reduce overall portfolio risk. mentioned that the portfolio
should have between 15 and 20 securities, we'll aim for a 15 security portfolio to achieve a
good level of diversification.

Asset class Securities Weight

Stock 4 45

Bonds 3 30

Real estate 3 15

Commodities 3 5

Equity 2 5

Total 15 100

Assume that after forming your portfolio in (iv) above you receive a sizeable inheritance
(Ksh.10, 000,000) that causes your portfolio objectives to change to a much more aggressive
posture. Describe the changes that you would make in your portfolio.

After receiving a sizable inheritance of Ksh. 10,000,000, the investor's portfolio objectives have
changed to a much more aggressive posture. An aggressive portfolio typically aims for higher
returns by taking on more risk. Here are the changes that could be made to the portfolio:

Increase Allocation to Equities: Equities, especially high-growth stocks and emerging market
stocks, tend to have higher return potential but also higher volatility. The investor may decide
to increase the allocation to domestic small-cap stocks, international developed market
stocks,and emerging market stocks.

Introduce Growth-Oriented Funds: Consider adding growth-oriented mutual funds or

exchange-traded funds (ETFs) that focus on companies with high earnings growth potential.
These funds can provide exposure to a broad range of growth stocks, which align with the
aggressive posture.

Increase Exposure to Risk Assets: The investor may increase exposure to riskier assets, such as
high-yield corporate bonds or alternative investments like private equity or venture capital
funds. These assets have the potential for higher returns but also come with higher risk.

Rebalance and Review Regularly: As the investor adopts a more aggressive posture, it's
essential to rebalance the portfolio regularly to maintain the desired asset allocation and risk
level. Periodic reviews will help adjust the portfolio based on changing market conditions and
investment performance.

Reduce Allocation to Bonds: Given the more aggressive posture, the allocation to government
bonds may be reduced to favor higher-growth assets.

Consider Sector-Specific Funds: The investor may consider adding sector-specific funds that
focus on high-growth industries like technology, healthcare, or renewable energy.

Incorporate Leveraged Funds (Caution Required): For a truly aggressive approach, the investor
may consider incorporating leveraged funds that amplify returns but also magnify losses.
However, the use of leveraged funds requires caution, as they significantly increase risk.

It's essential to note that adopting a more aggressive posture entails higher risk, and potential
losses could be substantial. Investors should thoroughly evaluate their risk tolerance,
investment horizon, and financial goals before making significant changes to their portfolio.

Asset class Securities Change in weight Amount

Stock 4 45-50 5000000

Bonds 3 30-15 1500000

Real estate 3 15 1500000

investment

Commodities 3 5-10 1000000

Equity 2 5-10 1000000

Total 15 100 10000000

Conclusion:
In conclusion, my investment portfolio is designed with a thoughtful and disciplined approach
to achieving my stated objectives. By carefully allocating funds between traditional and
alternative investments, I aim to strike a balance between growth potential and risk
management.

The diversification across different asset classes not only helps to mitigate individual risks but
also positions the portfolio to capitalize on opportunities in various market conditions. This
dynamic approach enables me to adapt to changing economic environments and potentially
enhance returns over the long term.

However, it is important to note that all investments carry some level of risk, and past
performance is not indicative of future results. Regular reviews and adjustments will be crucial
to ensuring the portfolio remains aligned with my financial objectives and risk tolerance.

As an investor, I am committed to staying informed, seeking professional advice when needed,

and maintaining a long-term perspective to navigate the ups and downs of the market
successfully.

References

Cohen,Zinbarg et al,(1987),investment analysis and portfolio management, Irwin.

"Directory of Commercial Banks And Mortgage Finance Companies" (PDF). Central Bank of
Kenya.

Retrieved 18 August 2022

Fischer, Jordan,(1995),security analysis and portfolio management,Prentice-Hall,India.

Gitman,Joehnk,(2005),fundamentals of investing, Addison Wesley.

Hollman,Rossenbloom,(1984),personal financial planning, McGraw-Hill.

Mugwe, David (2 February 2011). "Co-op Bank Wins Financial Times' Award for Growth".
Business Daily

Africa (Nairobi). Retrieved 18 August 2022

Mutegi, Mugambi (29 April 2015). "Coop Bank Posts 29 Percent Growth in Earnings on
InterestIncome".

Business Daily Africa (Nairobi). Retrieved 29 April 2015.

Pike, Neale,(2009),corporate finance investment Decisions and Strategies,Prentice-Hall,India.