Case Study 2
Question (a)
As stated in the question, Lucy is investing in speculative stock. A speculative stock is a stock that has high level of risk on investment with unforeseeable results but provide high returns. As refer to the general rule that high risk gives high return, a speculative stock usually offers sufficient returns in order to remunerate for its riskier characteristic. In general, due to the higher risk, these stocks have a lower share price compare to others.
In fact, Lucy is eventually involves in speculative risk. The main risk that Lucy will be suffered for is that company may be unable to operate the business as a going concern and Lucy will probably loss entirety of her investment. Lucy could be receiving huge returns from the investment if “fortune event” falls on the company and driving the price up rapidly. However, Lucy has to be prepared for the risk that if the “fortune event” does not happened, and the company unable to operate anymore and fade out from the market. Therefore, before investing in this speculative stock, Lucy must have high tolerance for risk and must realize that she has chance for huge returns yet a possibility for huge loss.
Question (b)
Investment program of Lucy is currently invests in speculative stocks as shown in the question. As mentioned in the answer of Question (a), a speculative stock is a high risk investment that gives high profit in return.
By investing in this speculative investment, Lucy may find that investing is challenging. Just like how Jim Cramer illustrates speculative stocks, “High-risk, high-reward speculative stocks keep investing interesting,” he said (as cited in Sandholm, 2011). When the corporation is doing right, Lucy may earn a huge amount of for...
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...iminate the low performance in home country. This idea is simple, when the U.S market undergoes economic downturn, there are potential that opportunities of investment abroad are better. Through adding foreign stock to her investment, Lucy is able to earn revenue
same with an all-domestic portfolio yet lesser volatility. In other words, adding foreign stocks enable Lucy to earn higher return with lower risk. As globalization happens to tighten the links between global markets, it creates various opportunities for businesses as well as chances to invest in foreign stocks. Notwithstanding, light creates shadow, if Lucy is invest in foreign stock, she must also be cautious to the risks of it. The risks of foreign stocks include political risk, market risk and currency risk. These are the elements she have to look into before decide to jump into any foreign investments.
My conclusion is that the protagonist should buy more stock of Costco Wholesale Corporation as she concluded the company is growing at manageable rate without relying on debt or equity. They are with high sales or profit, low labor costs, and consistent growth. Costco seems to be a low risk stock that is performing well with long term stability for more
Before we invested, we decided to pick two types of companies to invest in. We would choose companies that had expensive stock but steady increasing prices and we would choose smaller companies that had cheaper stock but whom had a chance for potential huge price increases. If the smaller companies’ stock went down the bigger companies’ steadily increasing stock would even it out, but if the smaller companies’ stock price rose greatly, like we predict, we could sell and make a good profit. We found a big name company that had reliable stock prices pretty quick, but finding a small company whose stock price could rise was hard. We
To fully grasp the similarities and differences of these financial crises one must first understand the circumstances that surrounded the panics. The financial panic of 1907 can be traced back to 1901, the beginning of the Roosevelt presidency, and his crusade against monopolies and big business by enacting strict anti-trust laws. Business began searching for ways around these new anti-trust laws which led them to chasing riskier profit. This activity went nearly completely unregulated, as there was no central bank at the time. Stocks suffered a period of increasing volatility stemming from multiple factors including: the April 1906 San Francisco Earthquake and the Hepburn Act, a form of regulation which depreciated the value of railroad securities and international market interest rate changes. Decreases in money supply lead financial institutions to begin deleveraging. The panic would truly begin with an attempt to corner the market orchestrated by Augustus Heinze, a copper tycoon, his brother Otto, and Charles Morse a Wall Street banker. They devised a scheme to manipulate the price of United Copper stock and gain market share. The Heinze brothers created a short squeeze where they planned to purchase the remaining shares and force short sellers to pay for their borrowed stock. They believed that this would drive up the share price of copper and force the short sellers to pay whatever price the Heinze brothers and Morse wanted. To properly pull the scheme off a large amount of financing was needed, which they looked to the Knickerbocker Trust Company for. President Charles Barney had financed Morse’s previous schemes but decided that this particular scheme was too risky. However, Barney’s denial was not enough to discourage the...
...irect control of foreign interests, absolute and comparative advantages and sometimes the strength of ties with major foreign markets. The problem of geographic and economic distance is one that is not solved easily. There must be a cross-border trade in goods and services and this could be done with little direct involvement abroad. Businesses may also be able to systematically work local markets abroad by establishing branch offices in the given country. There is also the option of investing in an existing firm abroad, which minimises the risk involved. Ideally, investor motives will broadly match the requirements of target countries or firms, with the interests of the latter focusing on expanding production capacities, enhancing productivity growth, benefiting from employment opportunities and getting access to technological know-how (A. Breitenfellner, 2008).
International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Finally, the third phase is where we profited from our investments. Having performed poorly in the equity market, we developed a new strategy of investing. This strategy focused more on the commodity sector rather then the equity sector. Therefore, at the beginning of March we bought contracts in gold, corn, platinum, lumber, and the United States currency. As equities dropped, the prices of commodities increased allowing our lumber, corn, and platinum to make huge gains.
The greatest investors in the world all understand one common theme when it comes to successful investing, “markets are volatile and they fluctuate.” Whether it is real estate investing or investing in stocks, there is an inherent risk. Therefore, new investors who are trying to decide whether to invest their available capital in real estate or stocks must learn to understand their own risk tolerance. To understand risk successfully, new investors must first learn some of the pros and cons of both real estate investing and stock market investing.
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
One reason is that many successful investment ventures itself is the outcome of these ‘irrationality’. Risk-taking, which is inevitable in investment, may contribute to the investors’ better performance than others, while with the assistance of proper training, assessment accuracy can be increased(Palich and Ray Bagby, 1995). Also, if without precedent, most of the newly-invented value-maximising approaches or strategy of investment ought to be considered as crude and unthoughtful, but in reality, they are regarded as innovation(Busenitz and Barney, 1997). Furthermore, there are evidence shows that instead of being the hindrance of correct investment decision-making, those biases and heuristics are backed up by probabilistic information. Accurate statistical probability can be evaluated by our inductive reasoning mechanism with a relatively high possibility(Cosmides and Tooby,
There is a sense of complexity today that has led many to believe the individual investor has little chance of competing with professional brokers and investment firms. However, Malkiel states this is a major misconception as he explains in his book “A Random Walk Down Wall Street”. What does a random walk mean? The random walk means in terms of the stock market that, “short term changes in stock prices cannot be predicted”. So how does a rational investor determine which stocks to purchase to maximize returns? Chapter 1 begins by defining and determining the difference in investing and speculating. Investing defined by Malkiel is the method of “purchasing assets to gain profit in the form of reasonably predictable income or appreciation over the long term”. Speculating in a sense is predicting, but without sufficient data to support any kind of conclusion. What is investing? Investing in its simplest form is the expectation to receive greater value in the future than you have today by saving income rather than spending. For example a savings account will earn a particular interest rate as will a corporate bond. Investment returns therefore depend on the allocation of funds and future events. Traditionally there have been two approaches used by the investment community to determine asset valuation: “the firm-foundation theory” and the “castle in the air theory”. The firm foundation theory argues that each investment instrument has something called intrinsic value, which can be determined analyzing securities present conditions and future growth. The basis of this theory is to buy securities when they are temporarily undervalued and sell them when they are temporarily overvalued in comparison to there intrinsic value One of the main variables used in this theory is dividend income. A stocks intrinsic value is said to be “equal to the present value of all its future dividends”. This is done using a method called discounting. Another variable to consider is the growth rate of the dividends. The greater the growth rate the more valuable the stock. However it is difficult to determine how long growth rates will last. Other factors are risk and interest rates, which will be discussed later. Warren Buffet, the great investor of our time, used this technique in making his fortune.
I became an enthusiast of finance ever since I was at high school. At the political economy class, my teacher asked us: if you have a million RMB, how would you use it? She then introduced us the concept of investment, and I was intrigued specifically by the stock. For the latter two years of my high school, I have been reading books and articles regarding the stock market in the U.S. and in China. As one of the outstanding students ranked top 1% in College Entrance Exam in Hainan Province, China, I was accepted by the City University of Hong Kong with a full scholarship. With the strong interest in finance, I chose quantitative finance and risk management as my major.
Choosing two profitable stocks amongst a myriad of potential alternatives is a daunting task to say the least. In order to narrow my choices from thousands to two, I examined several aspects of companies I was interested in. Among these were, company overview, alpha and beta ratings, price ratios, price charts, and company headlines. After evaluating this information, I chose Intuit INC (INTU) listed on the NASDAQ and Johnson and Johnson (JNJ) listed on the NYSE.
The process of globalization allows the global market to include products and services from all the companies around the world, including all the investments that is across national borders. Indeed, many American companies have taken their merchandise, manufacturing and services to invest in other countries. However, this has produced a negative effect in the global economy. The American companies