QUESTION 1

You and your workmates have come together to form an investment group called Pamodzi Investments; requiring each member to make monthly deposits into a pool account. You are planning to use these funds to create a portfolio of investments in preparation for you retirements.

Todate, the balance in the pool account amounts to K150,000-00 and you are about to make your first investment. However, there is a challenge due to different preferences of which securities to invest in. As a way towards consensus, a colleague proposes to consider the Collective Investment schemes that are available on the market. He has heard that this is a better way of accessing diversification benefits for small investors.

As an Investment Analyst in the group, you have been approached by your colleagues to advise on the options to consider and how to set up some investment guidelines for the operations of the group.

Required:

1. Explain the relevance of having an investment policy while highlighting its key component parts.

[15 Marks]

2. Explain the justification of the Modern Portfolio Theory approach to creating investment portfolios.

[15 Marks]

3. Explain diversification and how it could be achieved in this situation with reference to Zambian financial markets.

[10 Marks]

Total 40 Marks