Stock Trading: Practical application in the London Stock Exchange
PORTFOLIO PROJECT
The investment policy shall be aimed at minimizing the credit risk. For example, the portfolio shall be diversified to minimize potential losses on individual securities. Investments shall primarily be channeled in short-term securities to minimize losses as a result of the fact that value of securities can fall due to changes in the general interest rate. To cushion from the effects losses as a result of currency risk, most of the investments shall be held in US dollars. (Swensen, 2000)
Most part of the capital shall be invested in stable companies as it is considered less risky as financial obligations of the blue chips firms are usually stable and promising. To meet the projected cash requirements, the portfolio shall be maintained adequately liquid to meet all the prevailing cash demands. This will be achieved by structuring the portfolio in such a manner as to mature concurrent with cash demands. Since all the cash demands cannot be projected, security worth resale markets shall be given a priority. Negotiable securities are sold before their maturity date to cater for cash demands. (Swensen, 2000)
The objective of the investment is to optimize the rate of return given the prevailing constraints. Benchmarks of various categories of the investment shall be established with the aim of formulating the best policy to maximize return. Unless in the case of urgent liquidity needs or security with a diminishing credit, the securities shall not be sold before the maturity date, in order to maximize rate of return. In accordance with the optimization objectives, assets and stocks shall only be sold at a loss on the realization that doing ...
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...-averse investing include high return, quick profit little capital needed. It however needed more experience strict money management strategies. Disadvantages include high volatility in portfolio value, high risk and lack of security of profit. (Sinquefeld, 1999)
References
Levine, N., 1980. The Investment Managers Handbook. New Haven: Irwin Professional Publishing
London Stock Exchange Indices, 2011, available at www.lse.co.uk/indices.asp
Sinquefeld, A. & Ibbotson, R., 1999. Annual Yearbooks dealing with Stocks, Bonds, Bills and Inflation: relevant to long term returns to US financial assets. New York, NY: The Free Press
Swensen, D., 2000. Pioneering Portfolio Management: an unconventional approach to institutional investment. New York: The Free Press
Ross, S.A., Westerfield, R.W., Jaffe, J.F., & Roberts, G.S (2001) Corporate Finance. 3 th ed.Toronto, McGraw-Hill Ryerson.
As a key feature of Graham’s book “The Intelligent Investor” the Margin of Safety is essential for the value investor, meaning for both Enterprising and Defensive Investor. It is a concept of choosing the best and undervalued Stocks or bonds. Graham’s theory led him to four very simple.
Melicher, Ronald W. and Norton, Edgar A. 2014. "Introduction to Finance: Markets, Investments, and Financial Management. 15th Edition". New Jersey: John Wiley and Sons,
Investing in stocks involves owning part of a company’s equity which effectively enables the shareholder to receive a portion of the company’s earnings and assets in form of dividends. Stocks are generally categorized as either common stocks or preferred stocks whereby common stock allow investors to vote on key issues but do not guarantee of dividends (Markowitz 78). Preferred stocks on the other hand do not provide voting rights but assure stockholders of dividend payments. Investing in stocks offers investors comparatively high returns relative to treasury securities but the investments also have high inherent risk. Stocks are purchased through licensed stockbrokers who range from the discounted order-taking online brokers, to the pricey full-service brokers and money managers (Sourd 112). Despite the type of broker an investor opts for, the stock market has the potential to generate high returns through an investment strategy. One of the main strategies employed is diversification which involves the purchasing of different stocks with varied performance and rates of returns in order to spread out the risk of the individuals stocks across a portfolio. Investing in stocks is therefore one of the most profitable alternatives of personal financial planning, and should be considered as one of the investment vehicles that generates an additional income stream.
[1] Brennan, Deirdre, Long-Term Capital Management: Technical Note on a Global Hedge Fund, Thunderbird, 1999
We began by selecting an appropriate risk-free rate and a market risk premium. The risk-free rate we selected is 3.48%. In selecting the risk-free rate, we used the geometric average return of short-term treasury bills from 1926 to 1987 because this average accounts for time as opposed to the arithmetic average. We used the range from 1926 to 1987, because the returns in the shorter time period ranges were much more volatile and did not predict the upcoming years as well. We selected our market risk premium using the geometric average return from 1926 to 1987 as well. After analyzing the spread between the S&P 500 composite returns and returns on short-term treasury bills, we chose 6.42% as our market risk premium.
... Capital, Corporation Finance and the Theory of Investment", The American Economic Review, vol. 48, no. 3, pp. 261-297.
Mutual funds were long considered one of the best available easy-to-invest instruments that minimized risk and maximized returns. In the 80’s and 90’s, the US financial markets made trillions of dollars with the mutual fund structure. The funds, especially the most actively managed ones, were expected to outperform the market index in the long run. However, with expense ratios ranging as high as 1.5% to 2.5%, the funds underperformed the index by the amount of their expense ratio.
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
Rob, Dixon, and Holmes Phil. Capital market; Stock exchanges; Foreign exchange market; Futures market. London: Chapman and Hall, 1992.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
Using the Modern Portfolio Theory, overtime risk assets will provide a higher expected rate of return, as compensation to the investors for accepting a high risk. The high risk will eventually lower collecting asset classes to the portfolio, thus reducing the volatile risk, and increasing the expected rates of return. Furthermore the purpose of this theory is to develop the most optimal investments portfolio which would yield the highest rate of return while ascertaining the risk for the individual or corporate investor.