Portfolio Theory is a way of budgeting that entails organizing budget activities into portfolios and comparing portfolios with each other in order to maximize utility. By creating portfolios, budget activities are not simply evaluated on their own merits, but also by how they interact with each other. A weighted average of expected returns provides the overall return of the portfolio, while examining the covariance of the activities in the portfolio shows the overall variance or risk that the portfolio has. By understanding the constraints and following particular rules, you can arrive at the best possible portfolio which will determine the best possible budget (Khan, 2002).
Portfolio Theory is not only used for budgeting, but is also used in investment strategies. Financial advisors create portfolios optimized to provide a certain rate of return at a certain level of risk. These portfolios can be comprised of a variety of financial instruments, like stocks, bonds, or mutual funds. In essence, the theory allows a client to build something to their specifications depending on how ag...
The financial challenge in the managing risk simulation was to balance between preserving capital and capital appreciation in the investment of funds based on a persons’ risk tolerance. The simulation targeted the stock mix for a client’s aversion to risk and the ability of the investment portfolio to have an expected rate of return. The prediction of fund future prices acted as a hedge and had an impact on the rate of return depending on the changing financial landscape of a company. The overall effect was to juggle the mix based on past history and predict a future outcome.
Brigham, Eugene F., and Houston, Joel F. Fundamentals of Financial Management. Second ed. Dryden, New York, © 1999.
Due to this passive view or narrow framing, people fail to understand the totality of a give situation. The rational-agent model assumes that investors make their choices in a comprehensively inclusive, broad framing manner, which factors all relevant details, including future opportunities and risk. In reality, investors have the tendency to evaluate their portfolios based on an extremely short time horizon. In addition, investor decisions about a particular investment are often considered in isolation of the total portfolio, especially if a loss occurs, as opposed to a comprehensive manner. Ultimately, short-term evaluations lead to excessive trading, increased portfolio expenses and
However, there is still a significant degree of uncertainty as to the effectiveness of one strategy over another amongst institutional investors and scholars alike. The vast majority of experienced investors believe that diversification, patience, and value are the three columns of successful investing. On the other hand, many researchers are still in disagreement about how viable other strategies such as growth, short-term and concentrated investing can be. Do all successful investors share this common thread of patience, value, and diversification in their investments or are there a plethora of investing techniques that investors utilize to achieve
...al portfolio based on risk preferences, personal constraints and investment objectives following the Mean-Variance Theory. We have applied a CPPI strategy to allocate assets dynamically over-time and highlighted its superiority compared to the Market and Benchmark Portfolios. We have used both classical (e.g. Sharpe Ratio) and advanced performance measures (e.g. T2, Omega Ratio). We have identified that much of the portfolio’s performance can be attributed to the Selection Effect. The significant MoM indicates the presence of Momentum Effect in the portfolio’s returns. We have highlighted the contribution of Omega Ratio in modern portfolio management because of its ability to capture Higher Moments. Overall, we conclude that insurance strategies, such as CPPI, can be quite useful when investors seek insurance against rapid falls in the market and crash in equities.
Budgeting Assignment A company's budget serves as a guideline in planning and committing costs in order to meet tactical and strategic goals. Tactical goals such as providing budgetary costs for daily operations, and strategic objectives that include R&D, production, marketing, and distribution are all part of the budgeting process. Serving as a guideline rather than being set in stone, the budget is a snapshot of a manager's "best thinking at the time it is prepared." (Marshall, 2003, p.496)
Ross, S.A., Westerfield, R.W., Jaffe, J. and Jordan, B.D., 2008. Modern Financial Management: International Student Edition. 8th Edition. New York: McGraw-Hill Companies.
This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assignment you are to limit your scope to the US stock markets only. Use the Cybrary, the Internet, and course resources to write a 2-page essay which you will use with new clients of your financial planning business which addresses the following issues and/or practices:
From my perspective, the usefulness of CAPM is directed towards efficient investment decision making and strategic management. Moosa (2013) remarks CAPM to be a supportive model in ‘evaluating the performance of managed portfolios and for investment purposes’.
According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio.
Portfolio management is a conglomeration of securities as whole, rather than unrelated individual holdings. Portfolio management stresses the selection of securities for inclusion in the portfolio based on that security’s contribution to the portfolio as a whole. This purposes that there some synergy or some interaction among the securities results in the total portfolio effect being something more than the sum of its parts. When the securities are combined in a portfolio, the return on the portfolio will be an average of the returns of the securities in the portfolio. For example, if a portfolio was comprised on equal positions in two securities, whose returns are 15% and 20%, the return on the portfolio, will the average of the returns of the two securities in the portfolio, or 17.5%. From this we will discuss the process of creating a diversified portfolio. The diversified portfolio is a theory of investing that reduces the risk of losing all your money when “all your eggs” are not in one basket. Diversification limits your risk an over the long run, can improve your total returns. This is achieved by putting assets in several categories of investments.
Capital budgeting is one of the primary activities of a company. Most of the company uses capital budgeting for decision making process of selecting and evaluating long-term investment. The company have to make a right decision with respect to investment in fixed asset such as purchasing of new equipment and delivery vehicles, constructing additions to buildings and many more. The decision must be right because of the project involve huge amount of cash outflow and it is committed for many years.
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
Line item budgeting categorizes various expenses and places them in list format on a document for budgetary purposes. This type of budgeting is considered the heartbeat of budgeting due to the systematic method by which it controls revenue and expenses, this is made evident when Tyer and Willand (1992), pointed out “Statutory or administrative controls could be imposed on the transfer of funds from one-line item to another, or between broad categories of expenditure.” According to Schick (1971), “line item budgets were attractive to legislative officials because they did not focus explicit attention on substantive policy issues or choices.”
The Modern portfolio theory {MPT}, "proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.