Mispricing Assets

Mispricing financial assets, for example a company’s stock, has many implications on the company’s real assets. As stated in chapter 1, real assets determine the wealth of the economy, and financial assets allow us to make the most of those real assets. Investors invest in a company’s financial assets, such as stocks and bonds, based on prospective profitability from their investment. If a company looks to be an attractive investment (underpriced security), investors bid up the stock price. This allows more shares to be issued for investors to purchase, which brings in more funds to be allocated towards business operations/ventures. In short, if a stock is underpriced, a company can benefit by using the investment capital to improve current real assets and also allow management to finance and expand into other business ventures.

Investment Objectives & Asset Allocation

Our client, Cody Walker, is 30 years old and has recently inherited $1,000,000 from his aunt for use during his retirement.  After assessing Cody’s current financial situation, we developed our investment objectives for his portfolio.

Cody’s main investment objective is capital appreciation with the primary focus on the growth of his original investment. Achieving this growth is structured through Cody’s risk tolerance, which after reviewing his results of the questionnaire, Cody is a moderate risk taker. Therefore, Cody seeks to balance potential risk with the goal of higher potential long-term growth. The tenure of Cody’s investment is a long-term time horizon of 25+ years - his goal being to retire by the age of 55.

Given Cody’s background, risk tolerance, and objectives, we were able to plan his portfolio’s asset allocation. We chose to invest 70% in equity and 30% fixed income with our goal of 7% return.