Topic: Discuss the concept of portfolio analysis and some of the key principles and theories used by professional investors. Exploring the theory and giving some insight of evidence supporting (or refuting) the theory. What is my understanding of Portfolio Analysis? Upon reading and researching Portfolio Analysis, I have deduced that is a strategic planning tool implemented by stakeholders or business owners to assist in recognizing and making suitable business related decisions regarding new or old but lucrative investments. This tool is also used to weed out less profitable investments which allow stakeholders to take a closer look at where the resources could be better utilized.
When I seek out people who have money, I am not after their money but their ideas. Don’t listen to poor or frightened people. Wise investors buy an investment when it’s not popular. They know their profits are made when they buy, not when they sell. You become what you study.
Many stock brokers are trusted with huge amounts of money given by their clients willingly. Their clients give them this money in order for the stock broker to make more of it. Many clients give their money away without any form of documents, just word of mouth. Stock brokers should not be able to manage another’s person money without legal oath, legal document and a professional advisor present. With these check points in place the probability of unsuitability fraud, improper investment advice, hidden cost, over concentration and churning would be much less than it is right now.
Lastly since the company would be working in a different field, investors might invest in them and their stock price would go up. Unfortunately there are some cons to this solution. Since they are in a big debt it would be hard for them to sell the company and they would have to go through a big process. Not many people would want to buy this company as many investors think Penn West is a bad investment, so their company might be sold for very less and even after giving up everything they may not make much money. Lastly, investors might not invest in their company due to the company image they had previously.
Debt and equity methods are important decisions when deciding what to do with an instrument like stock options. All three methods, debt, equity, or a combination, are helpful in keeping the books correct and fair until the employee exercises their option. The best method in my mind is the combination of methods. It best shows were the money will go on average before the option is decided on. However the other two methods are also important considering the pros and cons of each decision.
There have been disagreement on whether or not options are actual ownership. Some believe they are ownership because employees do not receive them for free, they use their own money to purchase the share. Others believe that since the employees can sell their shares a short time after purchasing them they do not have the long-term ownership goal. A few simple terms with stock options are a call, a put, and a premium. A call is the right to buy the stock, a put is the right to sell the stock and its premium is the price of the option.
This approach allows advisors to communicate more effectively with their clients based on client needs. Conclusion Investors are not by nature rational investors, as was assumed in economic theory. Investors are subject to many behavioral biases and heuristics such as framing, representativeness, and loss aversion. By embracing the fact that your clients are behavioral and will react with emotion and behavioral biases, you will open yourself and your business to a new realm of possibilities. In the future advisors should work with clients to identity behavioral biases and identify the best solutions for an investor.
In the modern finance theory , behavioral finance is a new paradigm , which seeks to appreciate and expect systematic financial market influence of psychological decision making ( Olsen R A, 1998). In the recent studies irrationality in the decision making was revealed , based on certain cognitive limitations. The present chapter is divided into two aspects According to traditional models in finance and economics, human beings are rational while taking their decision. However the recent studies explain that decision making is based on certain cognitive limitations. As the information’s are overloaded, we will be applying certain short cuts or heuristics in order to take a decision.
Markowitz's first point is to build the envelope curve which is giving the maximum return or minimum risk for a giving stage of return, this shows the investors a group of portfolio available choices when investing in a set of risky assets and it is advising the investors to invest in particular portfolio (Watson & Head, 2006). However the portfolio theory has many problems with the practical application such as: the ability of investors to borrow at risk-free rate it is unrealistic, the theory has a problem in identifying the market portfolio and after identifying the make-up of the market portfolio it is expensive to be built because of the transaction cost which is unaf... ... middle of paper ... ...is the security market line which is the liner relation between risks and returns (Watson & Head, 2006). In the security market line investors want bonus added to what they receive on a risk-free investments to make them invest in something risky such as shears (Arnold, 2008). That makes the security market line important for the investors because is identifying the risk in the market as a systematic risk (Arnold, 2008), which needs to be compared with risk and return of the market and with the risk-free rate of return. This comparison is necessary to calculate tow things which are: the demanded return for the security and the fair price (Watson & Head, 2006) Works Cited Watson, D.W. & A.Head (2006), corporate finance: principles and practice Essex: Pearson Educational Limited.
A passive strategy involves minimum input and instead relies on diversification of the portfolio in order to match the performance of the market index. Passive management is usually characterized by a buy-and-hold strategy because the efficient market theory indicates that stock prices are at fair levels, given all available information and it makes no sense in frequent buying a... ... middle of paper ... ...his fact is utilized by the investors to plot wining strategies. Furthermore, the evidence from this study suggests that it is not necessary to know predictable patterns and market inefficiency in order to implement profitable investing strategies. Taken together, these results suggest that investors are able to achieve higher returns and minimize transaction cost by adopting indexing strategy which mimics the market. The second major findings are the contrasting view of behavioral finance.