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Investment And Portfolio Management: Index Benchmark

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Discuss about the Investment and Portfolio Management for Index Benchmark.



Index benchmark sets point of reference for portfolio evaluation on stocks.1nvestors are mostly provided with information on stocks that they use to contrast the performance of their individual investment portfolio with the mean overall market performance in the same sector.Different states use specific benchmark index for track performance as illustrated below;

In Australia, the fixed income index series is what is used as the benchmark for measuring the performance of the bond while the money market is always benchmarked by Australian Bank Bill Index Jones(2008.Pg 200). Dow Jones U.S. Financials Index is that index benchmark applicable to the United States region for measurability performance of stocks and market at large however it is divided into Dow Jones US Select Investment Index form and that of Dow Jones U.S López(2007.Pg 298). Select Insurance Index depending on the market field. Hong Kong stock market, especially on funds, is seen to be benchmarked by an index known as Hang Seng Index (HIS), this index measures performance is used to track economic performance of stocks in Hong Kong Liu(2009.Pg 60).

Vanguard FTSE Japan Index ETF is the point of reference of equities in Japan and it is used to evaluate market performance of large and medium-size stocks in Japan Stock Market. United Kingdom is likewise seen to have its stock benchmarked by an index known as FTSE All-Share Index that serves the measurability performance of among the largest companies in London Stock Exchange. Finally in China MSCI EM Index is what sets the point of reference of stocks in China it is seen to control and measure stock performance in China.

Stable fund assets are referred to as defensive assets since they procure stable and less risk income basically on interest payments made. Stable fund assets are featured to be less tolerance for risk and high market volatility Faff(2005.Pg 260). This asset basically suits short-term investors and they include cash and fixed interest based investments that are mostly seen to generate less return.

A balanced fund, on the other hand, involves combination mixture of stocks components with the aim of mixture safety stand on investors. The asset class in balanced funds includes bonds especially the treasury bonds that are deemed less volatile. Equities used as investment objective likewise forms part of balanced fund asset class Bauer(2005.Pg 1760).

Growth fund is featured to suit development and growth of investment, although they have the aggregate potential of earning high returns they likewise have subsequent high levels of risks over projects being taken for a long time. Securities shares representing ownership in company’s forms part of growth asset class Ferreira (2013.Pg 500). Likewise, the class includes infrastructures, listed and unlisted properties the likes of trusts, real estates and private equities investments that are deemed exist able for growth purpose Haiss(2008.Pg 420)

Ideally, duration of a security is deemed to be the average maturity life of the security, it is further prudent to note that the interest rate is flexible upon duration such that the sooner the redemption or payment maturity of a security the lower the interest and vice versa. Duration is hence termed as the direct measure of the interest rate elasticity because proportion adjustment of duration numerically the more likely the price rate of the security changes more the same to the interest rate Brewer(2007.Pg 410).

Detailed understanding can be approved upon the arithmetic use of formulae as illustrated; DP=-D {dR/1+R) P, where R=Interest Rate, D=Price percentage change, P=Price of a security. From the formulae, we can comfortably state that a known security duration leads to price changes as a result of change in interest rates Breeden(2009.Pg 40)

Conclusively it is prudent to state that investors should understand that security duration is measured and determined with the analysis that if interest rates increases, of course, the duration of maturity decreases and hence the yields are lowered as the prices get lower and vice versa. Likewise, there is the need to realize that decline in interest rates goes hand in hand with higher duration’s securities thus causing the decline in yields as a result of the change in prices upwards. It is therefore transparent that there is huge gain or benefit on investing in the higher duration securities than those of lower maturity duration Van (2005.Pg 121)



=0.1/2=0.05, =0.05*1000=$50


=$1000+$50=$1050 it is to be mature at year 11*2=22

=To get the cash flow you multiply by present interest factor at            

=Yr. =year multiply by bond yield multiply by present interest factor at that year                           

=Yr. 14 =14*50*0.505=353.55                  = Yr. 15 =15*50*0.481=360.77

=Yr. 16=16*50*0.458=366.49                    =Yr. 17 =17*50*0.436=370.86

= Yr. 18 =18*50*0.416=373.97                  =Yr. 19=19*50*0.396=375.94

=Yr. 20=20*50*0.377=376.89                    =Yr. 21=21*50*0.359=376.89

=Yr. 22=22*1050*0.342=7896.74


Duration= (13821.15/ 1000/2) = 6.91

While Modified duration = D/ (1 + R/2)

Hence=6.91/ (1+0.05) =6.581

MD=6.581 Years

For Dollar Duration= MD x P, where MD=Modified Duration and P=the principal amount of the bond


(b) In case the coupon rate increases by 0.10% the price change of the bond is likewise expected to decrease as being illustrated here below,

Price Change Estimation= the negative dollar duration multiply by the change of the interest rate.

Negative dollar duration=-$6581

Change in interest rate=0.1/100=0.001

= -$6581*0.001= -$6.581

Therefore the new price of the bond is expected to be=$1000-$6.581=$993.42

If the interest rate is reduced by 0.20% Lee(2011.Pg 450) there will be increase in price of the bond as calculated below;

Negative dollar duration=-$6581

Change in interest rate=0./100=-0.002

It is negative since its decreasing

= -$6581*-0.002=+13.162,

Thus the new price should be=$1000+$13.162=$1013.16

(c)The actual prices of the bond at 0.10% increase and 0.20%

Interest Rate Change                 Price Estimated          Actual Price                     Error

0.10% increase                          $993.42                     $ 993.35                              0.07

0.20% decrease                         $1013.16                    $1013.36                              -0.2

The errors mostly result from the non-consideration of convexity at the time of measuring and determining duration elasticity Harmantzis(2007.Pg 120).

Paid Dividend =20cents per share, the par value=20cent

Rate=0.16, therefore we can formulate

Share Price=Dividend Paid dividend by the difference between the rate and the growth thus; Price=20*(1+0.08) ^1(16%-8%)

=21.6/0.08=270cents in year 1

Therefore the par value of the share at year one is 270cents

The growth of dividend will be8%

Value of Share 5yrs=270 cents (1+0.08) raised to power 6 divide by the change of rate from 16% to 8%

Value in Five years=20*(1.08) ^6=31.74cents

=31.74cents/ (16%-8%) =/8%


By assuming that the dividend is expected to grow at 20%

At par the dividend was 20cents now it is to grow by 20%, therefore, the dividend will rise to this should be done yearly

= yr. 1=20cents (1+0.2) ^1/ (1+0.16) ^1=20.689,

=yr. 2=20cents (1+0.2) ^2/ (1+0.16) ^2=21.4,

=yr. 3=20cents (1+0.2) ^3/ (1+0.16) ^3=22.1,


We further need to add the present value of the dividend=467/1.16^3=299.35 to the sum of the 3year dividend change value;

=299.35+64.17=363.5 cents. Therefore the selling price or issue price today of the share stands at 363.5cents.

We can therefore generally conclude by stating that equity stocks are always subjected to the time value of money for purpose s of measurability Zhang (2009.Pg 5100).

Portfolio analysis generally majors on diversifying risks through setting up investments strategies after conducting performance evaluation on the existing market portfolio. It involves mitigation of risks under the umbrella of maximizing returns. Most investments are prone to risks and hence greater strategies and plan has to be built on strong portfolio management evaluation so as to curb risks and its volatility. It is therefore important to ensure that before proceeding to partake any investment the need to analyze return, duration, risks and entire field of performance.




Bauer, R., Koedijk, K., & Otten, R. (2005). International evidence on ethical mutual fund performance and investment style. Journal of Banking & Finance, 29(7), 1751- 1767.
Breeden, D. T. (2009, December). The Use and Misuse of Models in Investment Management. In CFA Institute Conference Proceedings Quarterly (Vol. 26, No. 4, pp. 36-45). CFA Institute.
Brewer, E., Carson, J. M., Elyasiani, E., Mansur, I., & Scott, W. L. (2007). Interest rate risk and  equity values of life insurance companies: A GARCH–M model. Journal of Risk and Insurance, 74(2), 401-423.
Faff, R., Gallagher, D. R., & Wu, E. (2005). Tactical asset allocation: Australian evidence. Australian Journal of Management, 30(2), 261-282. 
Ferreira, M. A., Keswani, A., Miguel, A. F., & Ramos, S. B. (2013). The determinants of mutual fund performance: A cross-country study. Review of Finance, 17(2), 483-
Haiss, P., & Sümegi, K. (2008). The relationship between insurance and economic growth in Europe: a theoretical and empirical analysis. Empirica, 35(4), 405-431.
Harmantzis, F. C., & Tanguturi, V. P. (2007). Investment decisions in the wireless industry applying real options. Telecommunications Policy, 31(2), 107-123.
Jones, S., Van der Laan, S., Frost, G., & Loftus, J. (2008). The investment performance of socially responsible investment funds in Australia. Journal of Business Ethics, 80(2), 181-203.
Lee, H. W., Xie, Y. A., & Yau, J. (2011). The impact of sovereign risk on bond duration: Evidence from Asian sovereign bond markets. International Review of Economics & Finance, 20(3), 441-451.
Liu, W., & Morley, B. (2009). Volatility forecasting in the hang seng index using the GARCH approach. Asia-Pacific Financial Markets, 16(1), 51-63.
López, M. V., Garcia, A., & Rodriguez, L. (2007). Sustainable development and corporate  performance: A study based on the Dow Jones sustainability index. Journal of Business Ethics,  75(3), 285-300.
Luckert, M. K., & Campbell, B. M. (Eds.). (2012). Uncovering the hidden harvest: valuation methods for woodland and forest resources. Routledge.
Van Vuuren, G. W. (2005). Duration as a strategic interest rate risk management tool infinancial institutions (Doctoral dissertation, North-West University).
Zhang, B. Y., Zhou, H., & Zhu, H. (2009). Explaining credit default swap spreads with the equity volatility and jump risks of individual firms. The Review of Financial Studies, 22(12), 5099-5131.

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