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Investment decisions for investment appraisal
Portfolio management case study
Portfolio management case study
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Portfolio Management
Introduction:
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.
Portfolio Process:
The portfolio process is as follows:
1. Designing an investment objective;
2. Developing and implementing an asset mix;
3. Monitoring the economy and the markets;
4. Adjusting the portfolio and measuring the performance
Due to the intensity of each of the four items, we will be covering only the first two.
1. Investment Objective:
This topic is broad and contains three major divisions. They are foundation objectives, constraints and major objectives.
Foundation Objectives: These objectives generally receive the most attention from investors and are determined by thorough determination of your needs, preferences and resources.
Return – you need to determine whether you prefer a strategy of return maximization, where assets are invested to make the greatest return possible while staying within the risk tolerance level, or whether a required minimum return with certainty is preferable, generating only as much return with emphasis on risk reduction.
Risk – There are many ways to assess the risk tolerance of any particular investor, from the least knowledgeable of investments to the very sophisticated investor. Beside...
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...the market as a whole. Diversifying among a number of securities can reduce nonsystematic risk.
Both of these types of risk can be avoided when you correctly evaluate your risk guidelines and determine the maximum amount of risk that you are willing to handle.
Conclusion:
Once your portfolio has been established then next step in the management is to evaluate your portfolio’s performance. The success of your portfolio is determined by comparing the total rate of return of the portfolio to the average total return of comparable portfolios. It is essential to develop a system to monitor the appropriateness of the securities that comprise the portfolio and the strategies governing it. The process is twofold as it involves monitoring:
The changes in your goals, financial position and preferences;
Expectations in capital markets and individual companies;
Remember that diversification is more than placing your eggs in different baskets. It is also making sure that all your baskets aren’t made from the same material.
References:
Wall Street 101, www.familyinternet.com
Learning to Invest, www.learningtoinvest.com
Your Money Coach, www.yourmoneycoach.com
If you have formed a conclusion from the facts and if you know your judgment is sound, act on it- even though others may hesitate or differ”. The investor is not wrong if the crowd disagrees, and the other way around. It is also I important for the investor in both Enterprising and Defensive Investor to diversify with the amount of different Stocks and bonds.
Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. In Fun with Dick and Jane there is a scene where Dick and Jane find themselves stressing when all of their belongings start to get repossessed. They discover that after the crash of Dick’s company they would owe more to the bank than the house is worth. Right after they find this out, Jane points out that both of their savings and pensions were in Globodyne stocks. The company failed and they basically lost all of their retirement and lifesavings because Globodyne stock was now worth pennies. This shows the importance of diversification in a saving and investment portfolio. If you diversify your portfolio, your investment performance should be subject to less fluctuation because the gains of some investments will cancel out the losses of others. Therefore, the risk is less if you don’t put all of your money into only one type of investment. I think talking about diversification would be important in Econ 277 because there should be a real world section. Where students could be taught about useful parts of the economy they could use to their advantage even if they do not choose to follow a career path that has to do with
For portfolio managers to experience positive returns they should be able to cover their expenses and costs of trading. Ian Domowitz, Jack Glenand Ananth Madhavan 2001 state that Investment performance reflects two factors
Risks are everywhere, however that does not mean one has to resort to accepting all levels of risk in the world. Risk is identifiable and as such can be mitigated down to a level where an individual is comfortable with or at the least tolerant of the risk. The stock market requires the use of an individual or business investor’s money and therefore involves considerable amounts of risk. Those who are averse to risk, yet can see the benefits of investing, must due their due diligence prior to investing in a stock that may be considered risky. By using beta and the security market line as tools to identify risk in the market, investors are able to mitigate risky decisions and build a comfortable portfolio that
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.
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.
The MDA model also showed potential to ease some problems in the selection of securities for a portfolio, but further investigation was recommended.
The core purpose of this research is to look over the issue in three aspects i.e.
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’.
Obviously at the intersection of high frequency and high severity, I will avoid the risk. If it is possible, everyone will seek to avoid any situation falling in that intersection. However, we cannot always avoid risks.
Diversifiable- This type of risk is opposite to systematic risk known as unsystematic risk and is specific to a company, industry, market, economy this can be reduced through diversification the most common sources are business risk and financial risk. So the main motive is to invest in different assets so that they will not all be affected the same way by market events.
As has been discussed before, risk identification plays an important part in the risk such as unique, subjective, complex and uncertainly. There are no two identical leaves in the world; similar, there are no two exactly the same risk either. Hence the best risk manger could not identify risk completely. Besides, risk identification assessment is done by risk analysts. As the different level of risk management knowledge, practical experience and other aspects between individuals, the result of risk identification may be difference. Furthermore, the process of identifying risk is still risky. Once risks have been identified, corporations have to take actions on limiting risky actions to reduce the frequency and severity of risky. They have to think about any lost profit from limiting distribution of risky action. So reducing risk identification risk is one of assessments in the risk
Our understanding and the concept of investment in behavioural finance combines economics and psychology to analyse how and why investors make final decision. As an investor one’s decision to invest is fully influence by different type of attitudes of behavioural and psychological ( Ricciardi & Simon, 2000). Yet, in order to maximize their financial goal, investors must have a good investment planning. Furthermore , to gain a good investment planning , there must be a good decision making among investors. They have to choose the right investment plan I order to manage the resources for different type of investments not only to gain profit wise but also to avoid the risk that occur from investment.
I am currently majoring in Finance Management. Most of the time people think of finance as just managing money. However, finance is needed for so much more! The finance industry deals with starting businesses, developing new products, expanding markets, as well as everyday things like saving for retirement, purchasing a home, and even insurance. The stock market, asset allocation, portfolio analysis, and electronic commerce are all key aspects in finance. In this paper, I will explain how these features play a vital role in the industry, along with the issues that come with these factors.
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.