Type: Analysis
Pages: 2 | Words: 591
Reading Time: 3 Minutes

Portfolio refers to a set of shares owned by an individual or an investment firm. Fabozzi (2007) defines portfolio as a group of securities that is capable of meeting objectives of any viable investment programme. However, investors face different challenges when investing their portfolios due to the complexities of the portfolio objectives. A section of investors prefers to focus their attention on the portfolio growth, some on income alone while others may balance the focus on income or the growth of the portfolio simultaneously (Faerber, 2000). These objectives depend on the risks that an individual is willing to take in order to succeed. Therefore, this paper aims at bringing out the best portfolio objective suitable for Susan’s investment.

Susan’s Income

Besides being the sole beneficiary of her father’s securities portfolio and other inheritance, Susan has other income. The inheritance has increased her gross income therefore the rate of taxation is likely to rise up to 40%. This is a growing concern for Susan because she is already paying taxes from her income. Given that she does not require additional income from her inheritance, Susan needs a portfolio objective that can reverse this trend.

Capital Appreciation Objective

Among the portfolio objectives, growth (capital appreciation) objective which focuses on capital growth rather than income suits Susan’s situation very well. Growth objective will ensure that Susan foregoes income in favor of capital appreciation (Faerber, 2000). On the other hand, capital appreciation will see Susan evades high taxation because long-term capital gains are taxed at a much lower rate compared to ordinary income (Faerber, 2000). Under portfolio objective, the equity value takes 80% whereas income and cash takes 20%. On the contrary, Susan’s father focused on the income objective alone.

Income Objective

Income objective focuses on the earnings that the investor will get from the investment of the portfolio (Faerber, 2000). It provides a leeway to the choice of securities for the portfolio by allowing bonds, stocks of interest, and high dividend yielding common stocks. This is exactly the case as shown by securities portfolio inherited by Susan from her father. In this kind of portfolio, equity constitutes about 20% while income and cash claims 80%. The risk associated with income objective is as low as between 5%-15%. Further, the income is highly taxed since the return is equally high.

Nonetheless, the asset allocation scheme reflected in the portfolio is a hybrid scheme because it has a mixture of both equity and debt instruments (Chandra, 2008). Equity instrument is attributed to the presence of bonds while debt instrument is characterized by the presence of stock (Chandra, 2008).

Capital Appreciation Objective versus Income Objective

Capital appreciation and income objectives differ by a big margin. Capital appreciation objective focuses on the growth of the portfolio by providing modest current income while income objective emphasizes on the current income rather than the growth of the portfolio (Morris, 2004). The risks associated with capital appreciation range from 15% to 25% compared to 5% to 15% accrued from income objective. Considering that the long-term returns record lower taxation compared to the short-term returns, capital appreciation objective is the best for Susan’s portfolio investment.


Susan’s portfolio is likely to face high taxation if she continues with the income portfolio initiated by her father contrary to her investment needs. In order to avert this phenomenon, Susan should adopt capital appreciation objective. In order to adjust the portfolio to her needs, Susan should consider the risks associated with such adjustments. Alongside the risks, she should consider the long term investment return because it will help in the later stages of her investment portfolio.

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