Write 8 page essay on the topic Personal Finance.Download file to see previous pages... Making money accomplishes little if it spent frivolously. Consuming more than one produces is not viable in the

Write 8 page essay on the topic Personal Finance.

Making money accomplishes little if it spent frivolously. Consuming more than one produces is not viable in the long term. A household that makes and spends but does not save will achieve immediate gratification, but will be caught short at some point in the future. A household that makes it, spends it and manages to save some is on the right track but without growing it may fall short of achieving goals (Peter Sander, p.4-5).

Personal finance involves planning both for today and for the future. The toady part is managing current income, expenses, and savings. Planning covers aspirational goals and the many of what-ifs of life (Peter Sander, p.4-5).

The quadrant model of personal finance popularized by Robert T. Kiyasaki's Raich Dad, Poor Dad series is a good reference. The four quadrants are Income, Expenses, Assets and Liabilities. The difference between Income and Expenses (net savings) builds Assets (good) or Debt (bad). The difference between Assets and Liabilities is net worth, which, of course, is good if positive and bad if negative (Peter Sander, p.4-5).

The total amount available for investing is GBP 100,000.00. The investment goal is to earn an amount of GBP 5,000.00. The period in which to generate an investment income of GBP 5,000.00 is one month. Considering the lead time the amount must be invested in high yielding securities in order to achieve the objective.

The decision has been made to invest in shares of Tesco Plc and BP Plc. Tesco Plc's shares has peaked to 470p in mid of May 2007 and again in mid October 2007 463.25p. BP Plc shares have commenced an upward trend at 562p from 04th October 2007 and peaked at 580.5 on 09th October 2007. The shares had been purchased at the price 579.25p.

It is the expectation that the appreciation of the share prices will continue further appears to have been basis of the decision to purchase these two shares. The two companies are in diverse sectors. This diversification assists in minimizing the impact of adverse results in one area. This would complement the composition of the portfolio. No data is available to differentiate whether that stock were purchased based on Sector selection or economic forecasts.

2. Calculation of Portfolio Risk

Portfolio Theory

Modern portfolio theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how a risky asset should be priced. The basic concepts of the theory are Markowitz diversification, the efficient frontier, capital asset pricing model, the alpha and beta coefficients, the Capital Market Line and the Securities Market Line.

MPT models an asset's return as a random variable, and models a portfolio as a weighted combination of assets. the return of a portfolio is thus the weighted combination of the assets' returns. Moreover, a portfolio's return is a random variable, and consequently has an expected value and a variance. Risk, in this model, is the standard deviation of the portfolio's return.(http://en.wikipedia.org/wiki/Modern_portfolio_theory)

Risk and Return

The model assumes that investors are rational, meaning that given two assets that offer the same expected return, investors will prefer the less risky one.