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Running Head: RISK & RETURN TRADE-OFF MEMO

Risk & Return Trade-off Memo

Name of Writer

Name of Institution

Risk & Return Trade-Off Memo 2

Memo

To: Rainier Ekstrom, Casa Bonita’s Chief Executive Officer (CEO)

From: Investment Advisor

Re: Constructing & Managing a Portfolio

The process of portfolio construction can be quite complicated. Experts go through tons

of research – past performance, future potential, and industry knowledge and depend on personal

ideas into the market to reach the final list. Every investor is designed to increase profits while

reducing danger. Individual investments must be analyzed not only on the risk-return trade-off in

solitude but also on their participation to the risk-return compromise of the entire portfolio. This

memo will be based on the Constructing and Managing a Portfolio Simulator that details the

basic principles of portfolio development in regards to the risk-return compromise and the

relationship between financial commitment technique and financial commitment performance.

As a investment specialist for Casa Bonita Ceramics, I was assigned to choose the best shares

and spend company sources to create a portfolio. This memo will details my choices made in the

simulation, talk about the Ho rate and how it is applicable to financial commitment choices, and

finally, provide suggestions for changes in the company's financial commitment technique in

order to improve its financial commitment performance.

The following will be a recap of recent investment portfolio decisions and actions taken

on behalf of Casa Bonita Ceramics with input and guidance from Casa Bonita’s CFO, Jerome

Walker and Corporate Treasurer, Nina Peres. Last March the investment team was authorized to

invest $800,000 in the stock market with minimal risk and the highest yield possible. At that time

the following capital market information was true.


Market Risk 15%Risk-Free Rate4.88%Market Return 11%Additionally, the following

eight companies were provided as options for investments; the financial team was asked to chose

the four stocks that would best suit Casa Bonita’s investment goals and risk tolerance.

1. Desktop, Inc.; the largest seller of office supplies worldwide. Products include business

services such as copying, printing, mailing, and shipping, as well as office equipment and

software.

2. Grand Capital Insurance; a 50-year-old financial services company named as a Fortune

500 diversified financial company.

3. Levinthal Defense Systems; a defense contractor that builds missile systems, radars,

targeting, reconnaissance, and navigation systems. Levintahl’s largest customer is the U.S.

Government.

4. Infoway Computers; IT products and service provider. Infoway is cutting edge in

introducing new products to market and turns inventory very quickly.

5. Transconduit, Inc.; leader in designing, developing, and manufacturing high-

performance, large badwidth silicon solutions. Also in the market of transport, switching and

routing services.

6. Goldstein & Delaney Bank: a bank spread across 21 states and 3500 branches that

offers retail account services as well as loans, investment, and financial services.

7.Western Connect Airlines; US based short haul low cost air service with the lowest

operating cost in the industry and consistently offering the lowest cost airfare. Western Connect

has grown from servicing three cities to 53.

8. One Voice Telecom; One of the largest telecommunication companies providing wire

line and wireless communications.


The investment advisor has chosen four different types of stocks by weighing the

amountof risk and return propose. These specific stocks were selected into consideration to the

accurate diversification to reduce any unsystemic risk. With a proper evaluation of each industry

and organizations the selection of Desktop Inc., Infoways Computers, OneVoice Telecom, and

Transconduit Inc., are used for the below analysis.Casa Bonita Ceramics chooses that the

company should not spend in an extremely excessive risk stock even if it is to accomplish the

maximum return.

The listed stock is a good fit and diversifies. Infoways Computers, Transconduit Inc., and

OneVoice Telecom are presenting elevated returns in the company’s stocks suggestions.

However, these-related threats run a high-level stock with these organizations.

There are other specific industries who have elevated risks and certain stocks keep decent

documentation. Infoways Computers is a hefty-sized organization and has immense potency

compared to the other industries.

The remainder of the organizations such as Goldstein and Delaney Bank, Grand Capital

Insurance, Leviathan Defense System, and Western Connect Airlines, the advisor has chosen

notto fully invest into Western Connect Airlines.

This choice was selected because of the fewer return and further risk than the other

industries. If the revenue value decreases, savings in banks and insurance businesses are most

likely not going to be appealing.

The threat can be reduce to an immense degree by branching out the portfolio. From the

above businesses, the advisor has selected Leviathan Defense System and Western Connect

Airlines because of Desktop Inc., presenting a superior return at a considerable elevated risk

roughly at 1%.


The portfolio includes Goldstein and Delaney Bank, Leviathan Defense System,

Transconduit Inc., and Western Connect Airlines. These particular stocks fit in with diverse

commerce’s thus expand the portfolio, and the choices are steady with the investment approach

for Casa Bonita Ceramics. This includes a target for capitalizing on returns on investments with

low risks. The stocks chosen provide an excellent grouping of high and average returns with

minimum threats to the business.

The next stage is to allocate funding for a total of $800,000 to capitalize on the portfolio

return as the instructions were clear to not exceed 22% of a portfolio risk. The main objective is

to decide on the appropriate diversification portfolio to reduce manufacture threats. By taking the

graphs into consideration such as the Efficient Frontier Graph, draws a resourceful limit that

symbolizes a range of subjective groupings of the portfolio asset giving away the utmost

expected return at a particular stage of an expected portfolio risk.

To further decide the best for Casa Bonita Ceramics there are no investments into any

government security or bank deposits made. This decision was made based on the extremely low

interest rate. This would have been a dangerous investment, and an inconsiderable amount of

thenet would not be influenced. Instead an investment of $200,000 was placed into each of the

stocksof Desktop Inc., Goldstein and Delaney Bank, Levinthal Defense Systems, and

Transconduit Inc.An expected return of 9.20% and risk of 17.19% with a sharpe ratio of 25.86%.

The sharpe ratio is a risk-adjusted measurement by calculating the standard deviation and

additional return to conclude the reward per unit or risk; the superior the number the healthier.

As for the ratio of 25.86%, this percentage is counted on the high level. In review of the

performance of the portfolio, the current portfolio amount of $757,614was applied only in the


amount of $42,386 with a sharpe ratio of 25.86%. The allocations of Desktop Inc. in the amount

of $216,327, Goldstein and Delaney Bank in the amount of $221,348,Levinthal Defense Systems

in the amount of $175,939, and

Transconduit Inc. in the amount of $144,000 were well diversified and condensed to the

particular risks. A strong investment strategy recommendation for Casa Bonita Ceramics would

be for management to discuss openly and identify the type of risk and return trade-off to

distinguish. From there a portfolio should be properly diversified to eliminate the business’s

threats. A high-quality tactic would be for the business to purchase and grasping collection of

payments in the long run. However, a portfolio ought to be evaluated and studied at all times

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