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Revisit the portfolio allocation spreadsheet submitted in the previous week. Determine the amount of long-term debt carried by each of the company from the portfolio. Then, make a determination as to the level of risk posed by the long-term debt for each company. Lastly, reorder the list of companies in the portfolio by the amount of risk posed by each company’s long-term debt load.

Your spreadsheet should contain 3 columns: company name, long-term debt load (the actual amount of long-term debt for each company), and risk assessment. In the risk assessment column, include a brief narrative evaluation of the risk posed by the respective company’s debt.

Sheet1

Asset Class Recommended Allocation (USD)
Cash on Hand $ 20,000,000.00
Fixed Income $ 40,000,000.00
Equities $ 40,000,000.00
Real Estate $ 10,000,000.00
Other investments $ 10,000,000.00
Total $ 120,000,000.00
Cash on hand: It is wise to preserve some of the money in liquid form in case of sudden demands for it, including operating expenditures, unexpected bills, or investment possibilities. A money reserve equal to three to six months of operational costs is a proper rule of thumb to follow. Let’s set apart $20,000,000 in reserve funds.
Bonds, or Fixed Income: Bonds and different constant earnings investments furnish capital preservation, a regular earnings stream, and different benefits. It might also be prudent to make investments some of the cash in fantastic bonds or bond money in mild of the present day low-interest fee environment. The proportion invested in fixed income should reflect the company’s risk tolerance and financial goals. Let’s invest $40,000,000 in fixed-income securities.
Equities (stock): Long-term, equity investments may bring about profit via price appreciation. The dangers and volatility associated with them, however, are greater. You may diversify your equity portfolio by purchasing low-cost index funds or exchange-traded funds (ETFs) that hold both local and foreign firms. The proportion invested in stocks might change according on the investor’s risk appetite, market expectations, and other factors. Let’s invest $40,000,000 in stocks and bonds.
Real estate: Investments in business actual property and actual property funding trusts (REITs) may additionally aid buyers attain diversification, earnings creation, and capital appreciation. Researching the nearby market, the property’s potential, and different elements is quintessential earlier than making a actual estate investment. Without further information about the company’s real estate investment strategy, determining allocations might be challenging. However, it’s possible to spend $10-20 million, or 10%-20% of the total, in property.
Other investments: The corporation may also look into other options, depending on its growth plan, investment prospects, and tolerance for risk. Acquisitions, strategic alliances, and VC investments are all possibilities. The precise distribution, however, would be contingent on the specifics of the company’s situation and its development strategies.
Rising Two Percent Point in Prevailing Interest Rates
One needs to consider the possible implications on fixed-income investments and the total asset allocation to ascertain the impact of a 2% increase in interest rates on the portfolio allocation.
Rising interest rates may have a wide-ranging and nuanced effect on a portfolio.
The possible effect should be evaluated in light of your investment objectives, risk tolerance, time horizon, and your portfolio’s particular allocation and diversity (Gudgeon et al., 2020).
Advice tailored to your situation may be obtained via discussion with a financial counselor or further study. In light of the anticipated rise in interest rates, here is a new allocation:
Asset Class Recommended Allocation (USD)
Cash on Hand $20,000,000.00
Fixed Income $34,000,000.00
Equities $40,000,000.00
Real Estate $10,000,000.00
Other Investments $10,000,000.00
Total $114,000,000.00
Explanation of changes:
Fixed Income:
Bond prices tend to fall when interest rate hikes are expected.
A decrease in the allocation to fixed-income assets may help protect a portfolio from the negative effects of interest rate increases.
As a result, we have cut the portion of the budget set aside for fixed income from $40,000,000,000 to $34,000,000.
Equities:
The stock market may suffer in the short term from higher interest rates, but in the long run, stocks usually do well when the economy is expanding. The equity allocation should be maintained at $40,000,000, notwithstanding the likelihood of rate hikes.
Cash on Hand, Real Estate, and Other Investments:
These asset classes are not directly affected by changes in interest rates. Therefore, their allocations remain the same,
with $20,000,000 cash on hand, $10,000,000 for real estate, and $10,000,000 for other investments.
The revised allocation considers the potential impact of rising interest rates on the fixed-income portfolio while maintaining the allocations to other asset classes.
It is important to note that this allocation is a general recommendation, and individual investment decisions should consider risk tolerance, investment objectives, and market conditions.
Conclusion
In conclusion, Interest rate fluctuations are not expected to affect the value of the asset types listed (cash, real estate, and other assets).
Therefore, they have kept the same allocations of $20,000 for liquid assets, $10,000 for property, and $10,000 for other investments.
The new allocation plan considers the possible effect of higher interest rates on fixed-income portfolios but maintains the existing proportions.
This strategy was developed to lessen the impact of interest rate fluctuations on a portfolio.
References
Gudgeon, L., Werner, S., Perez, D., & Knottenbelt, W. J. (2020, October). Defi protocols for loanable funds: Interest rates, liquidity and market efficiency. In Proceedings of the 2nd ACM Conference on Advances in Financial Technologies (pp. 92-112).
Muliadi, M., Darma, D. C., & Kasuma, J. (2020). MSMEs as mediation in the effects of investment credit, interest rates, and labor on economic growth: Evidence from Indonesia. International Journal of Finance & Banking Studies (2147-4486), 9(2), 01-12.
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