Portfolio Analysis and Investment 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: ? How individual investors make investment decisions in practice rather than in theory; and ? How investors manage their funds/savings/ investments in light of current stock markets. In your response, build upon extant portfolio theory and make sure to talk about different types of risks that investors might face and how they go about managing such risks. This means you need to consider topics such as efficient frontier and optimal portfolios; as well their relevance to investment theory. Furthermore, given the nature of the assignment, avoid bringing the brokerage industry into your discussion. In other words, assume you can invest directly in the stock market and do not need any financial intermediaries like brokerage houses. Investment theory is based upon some simple concepts. Investors should want to maximize their return while minimizing their risk at the same time. In order to accomplish this goal investors should diversify their portfolios based upon expected returns and standard deviations of individual securities. Investment theory assumes that investors are risk averse, which means that they will choose a portfolio with a smaller standard deviation. (Alexander, Sharpe, and Bailey, 1998). It is also assumed that wealth has marginal utility, which basically means that a dollar potentially lost has more perceived value than a dollar potentially gained. An indifference curve is a term that represents a combination of risk and expected return that has an equal amount of utility to an investor. A two dimensional figure that provides us with return measurements on the vertical axis and risk measurements (std. deviation) on the horizontal axis will show indifference curves starting at a point and moving higher up the vertical axis the further along the horizontal axis it moves. Therefore a risk averse investor will choose an indifference curve that lies the furthest to the northwest because this would r... ... middle of paper ... ...n efficient set that is on a straight line connecting the risk free rate to the most northwest point that we had identified previously. Now the risk averse investor has a lower risk for the same amount of return compared to the portfolios that did not include risk free lending. The combination is better because the points on the straight line are further northwest than the portfolios from the previous paragraph. Of course the lower the level of risk aversion the further toward the tangent the investor?s optimal portfolio moves. In summary, investors on the whole are rational and contribute to an efficient market through prudent investment decisions. Each investor?s optimal portfolio will be different depending on the feasible set of portfolios available for investment as well as the indifference curve for that particular investor. Lastly, risk free borrowing and lending changes the efficient set and gives the investor more opportunities to either get a higher expected return with the same amount of risk or the same amount of return with less risk. Work Cited William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
When investors try to only minimize one of the risks (small circles), stockholders leave themselves open / exposed to the other two scopes of risk: Beta and Matching (ALM). Understanding Risk Similar to what the article states, we have seen that risk is something that can go wrong, which we are unaware of until a crisis happens. Many people tend to ignore the short tails of distribution, saying they don't matter because there's a low possibility that it will occur. Think back to one such “perfect storm” that happened back in 2008.... ... middle of paper ... ...
Who exactly is a good person and what about them makes them a good person? In David Foster Wallace’s Good People, the question of what a good person is brought up. Lane and Sherri are Christian college kids who attend the same junior college. Sherri got pregnant before marriage and decides to keep the baby, and while Lane decides to stay supportive he has lost feeling of love for his girlfriend. Two different definitions are brought up, the question is which one is the true meaning of a good person? A good person is either a person who does good deeds but doesn’t truly mean them from the inside or a person who is down to earth from the heart but may not always do good deeds.
Dean has always valued his girlfriend’s value and faith and yet as soon as they affect him he backs away from them, “She was serious in her faith and values in a way that Lane had liked and now, sitting here with her on the table, found himself afraid of. This was an awful thing” (Wallace 2). When faced with the same morality that he had once admired he backs down, which shows that he never truly considered those traits as desirable. He merely thought them to be desirable because it was what he was told was desirable. He never fully understood what her faith and value actually meant or stood for, and now that he does he is afraid that they will have a negative effect on him. To be held as an ethical human being one must hold to their ethics even if holding onto them will harm
Through the use of symbolism, and characterization that involves an instance of imagery, the author advocates this notion through the newlywed’s decision of neglecting her personal feminine taste to make her husband’s preferences her own, and embracing her title of submissive partner by kissing the hand. Also, the choice of words to describe each partner differs tremendously, as the author seems to give more importance to the man by making him appear handsome, and particularly strong. On the contrary, the young woman appears to be weak and minor, which supports this idea of submissive women in a couple through the perception of the woman being way behind her husband. This story demonstrates a great symbolic significance when it comes to the hand, which can lead to other important ideas surrounding the message the author is trying to
Good, a word used by all, but most not truly knowing what the true concept of good actually is. What is good? Good, in my own understanding, entails an act or statement that is, not only morally and perceptively correct in the eyes of others, but also in one's own eyes. There is a sense of accomplishment; a sense of achievement felt when something good has been done. This feeling usually does not only pertain to the individual, but also to those around him who might have benefited in one way or another from his/her good deed or statement.
Healthcare in America is changing with increasing focus on health prevention and promotion of healthy living. The passing of Obama Care has renewed efforts within communities for education about disease related issues. The role of the Community Health Nurse (CHN) is defined as nursing care that is population-focused and community-oriented (Maurer & Smith, 2013). CHN’s center their nursing practice within the population selected and strive to meet the critical needs to the area. The Phoenix Zip code 85007 consist of a population in need of community health care and support. This community lives 44.5% below the poverty line with a median annual income of $27,200 per household.
1. Momentum: Narasimhan Jegadeesh and Sheridan Titman; October 23, 2001 2. From Efficient Market Theory to Behavioral Finance: Robert J. Shiller, Cowles Foundation Discussion Paper No. 1385; October, 2002 3. Behavioral Finance: Robert J. Bloomfield, Johnson School Research Paper Series #38-06; October, 2006 4. Efficient Capital Markets: A Review of Theory and Empirical Work: Eugene F. Fama, The Journal of Finance, Vol. 25, No. 2, May, 1970 5. Naive Diversification Strategies in Defined Contribution Saving Plans: Shlomo Benartzi and Richard H. Thaler, The American Economic Review; March, 2001 6. Prospect Theory: An Analysis of Decision under Risk: Daniel Kahneman and Amos Tversky, Econometrica, Vol. 47, No. 2. ; March 1979
The author begins the article by defining the concept of modern portfolio theory (MPT). Modern portfolio theory can be defined as a theory on how investors can have optimal portfolios that generate the heights expected return based on a given level of risk. In other words, it is possible to build efficient frontier of optimal portfolios that generate maximum expected return at a given level of risk. The article presents the optimization process in the theory by its inputs and outputs. The first inputs is the expected returns for each security, which can be estimated using historical returns. The second input is the covariance matrix that includes the correlation coefficient, the standard deviation, and the variance of each security. The last input is the constraints in the selection of portfolio such as the turnover of the portfolio or liquidity. On the other hand, the optimization process has to outputs. The first is the efficient frontiers that represent the risk-return trade-off portfolios. The second output is the choice of portfolio that has the risk and return optimization for the investor.
The original CAPM was engineered in a imaginary space, where the following assumptions about investors and the opportunity set were made (Shih, Chen, Lee & Chen, 2014).First, risk-averse investors will maximize the expected return of their wealth(Shih et al,2014).Secondly, price-taking investors have homogenous expectations about joint normally distributed asset returns (Shih et al., 2014).Third, there exists an unlimited amounts of risk-free assets that investors can lend and borrow at a risk-free rate (Shih et al., 2014).Fourth, there are a fixed amount of evenly divisible and marketable assets(S...
The employee engagement has become a hot topic of discussion in the corporate world. There is no single accepted definition of engagement or recognised approach for measuring or raising it. HRM Practitioners have involved in quite a lot of study to understand employee engagement and its impact on the performance of the organisation. According to them, employee engagement is a level of commitment and involvement of employees towards their organisation and its value. An engaged employee works with his/her colleagues to improve their productivity within their job, for the ultimate benefit of the organisation.
The bond market and bonds investments offer investor's (both individual and corporate) dependable income, relative safety and portfolio diversification. Because bonds typically have a predictable stream of payments and repayment of principal, many people invest in them to preserve and grow capital or to receive consistent interest income (http://www.globaldirectsvcs.com/Bond_Trading.html).
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.
The second type of portfolio objective is an Income portfolio. The type of investor that would be fit for this type of portfolio objective will have a risk tolerance of conservative to moderately conservativ...
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.
This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.