Wait a second!
More handpicked essays just for you.
More handpicked essays just for you.
Discussion of portfolio theory
Investment and portfolio management chapter 1
Discussion of portfolio theory
Don’t take our word for it - see why 10 million students trust us with their essay needs.
Recommended: Discussion of portfolio theory
4.2 Portfolio theory As stated earlier, managers are constantly faced with uncertainty, which is something many economic models do not account for. In microeconomics for instance, theory assumes that the competitive firm knows the price at which it will sell the product it produces. However, from the decision to produce, to the time of production and to the actual sale there might be a delay. Therefore the price of the product at the time of selling might differ substantially from what was expected (Markowitz. , 1991). According to Markowitz, this uncertainty cannot be dismissed, simply because if managers and investors could predict the future, they would place all their money on one investment – the one with the highest return. With this in mind, Markowitz developed portfolio theory, in which he proves the value of diversification as it reduces uncertainty. 4.3 Managing FX exposure With the theoretical part on FX exposure serving as background, this part focuses at some more practical issues that arise in terms of assessing the exposure. In order to manage the risk, a …show more content…
Since the rates are going to fluctuate, it is easy to imagine that the party, to whom the contract means a worse result than what the spot rate on the day of settlement will offer, will have a strong incentive to renege. Futures contracts solves this by use of two mechanisms, the first being that parties are required to post collateral, also called a margin, which serves as a guarantee that the parties can meet their obligations. The second mechanism is the daily settlement. Instead of waiting until the date of delivery, gains and losses are settled and exchanged every day through a process called ‘marking to market’ (Berk and DeMarzo, 2013). This means that cash changes hands every day, provided that the price of the contract
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.
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
1. What is the business reason for China Noah’s potential currency exposure? Does the company need to subject itself to substantial exchange rate risk? Is the risk “material” to China Noah? Do you think China Noah should hedge?
Market Risk is also known as Systematic Risk due to its broad impact on investments. The level of Market Risk depends on the probability that the entire market will decline and drag down the values of all companies. With Market Risk, investors stand to lose value irrespective of the companies, business sectors, or investment vehicles they are invested in. It can be difficult for investors to protect themselves against market risk, since investment strategies, like diversification, is mostly ineffective (Investopedia,
The article “Modern Portfolio Theory, Financial Engineering, and Their Roles in Financial Crises” discusses modern portfolio theory, and the financial engineering. The author mentions roles that modern portfolio theory and financial engineering played in the financial crises. Also, the author states the issue of why elegant mathematics leads to bad polices. In this assignment, I will summarize most of the points that are discussed in the article.
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’.
With thousands of stocks, bonds and mutual funds to choose from, picking the right investments can confuse even the most seasoned investor.
The article addresses the issue of being successful in a highly uncertain business environment. Some managers prefer to play it safe by adopting a wait-and-see strategy while others may invest in flexibility that allows their companies to adapt quickly as the market evolves. The companies sometimes neglect the fact that having a successful strategy depends on several factors, including their industry position, assets, or their willingness to take a risk in investing in such strategies. The paper introduced some of the tips and terminologies that could help managers facing uncertainty decide on whether to play safe or bet big. The traditional practice is to put a vision of predicted future events
Asset allocation decisions made by an investor are considered more important than other decisions such as market timing or security selection. In the research provided by Hensel (1991), performance attribution is one of the main components when choosing the right assets in a portfolio. The impact of any investment decision can be measured by comparing its outcome with the outcome of some alternative decision. Furthermore, according to Hensel (1991), every investor has to incorporate the minimum-risk portfolio, which is a combination of securities or asset classes that reduces the uncertainty of future portfolio returns to a minimum.
Portfolio theory deals with the problem of constructing a collection of assets that reflect the individual needs. When a portfolio is constructed a variety of parameters can be taken into account, such as value, average, the riskiness of the asset.
After the financial crisis of the late 1990s, the demands for risk management tools have increased. The investors have been effectively utilizing such products as KOSPI 200 futures and options, 3-Year KTB futures and USD futures to meet their hedging needs.
...a measure of economic risk). When multiple risky assets are held within a portfolio, it can be expected that some properties will increase in value while at the same time others will decrease in value. By holding risky assets in groups, some of the risk of each asset may be reduced or eliminated through the process of diversification.
Therefore, to achieve this objective, managers have to make choices in decision-making, which is the process of selecting a course of action from two or more alternatives (Weihrich & Koontz; 1994, 199). A sound decision making requires extensive knowledge of economic theory and the tools of economic analysis, that are directly related in the process of decision-making. Since managerial economics is concerned with such economic theories and tools of analysis, it is very relevant to the managerial decision-making process.
The concept of portfolio derives from the fact that when several investments are combined – rather than putting all the eggs in the same basket. Portfolio management is art of making decisions about investment policy and collections of something’s in anticipation balancing the risk and maximize the returns. We cannot talk about portfolio returns without talking about risk because investment decisions invariably involve a trade-off between the two. Risk refers to the possibility that the actual outcome of an investment will differ from its expected outcome. The major sources of risk are: business risk and market risk.
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.