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Relationship between risk and rate of return
Market analysis piece
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As the title suggests, Bernstein describes how to be a successful investor using his four pillars of Investing. This easy to understand book lays out Bernstein’s four essential topics that investors should understand: the relationship between risk and reward, market history, the psychology of the market and investors, and understanding what it means to take financial advice from investment salespeople. The author devotes a section of his book to each pillar; which in short are theory, history, psychology and business.
The first pillar is arguably the most important pillar. This is where Bernstein describes the relationship between risk and return and describes how to increase return while decreasing risk. While reading about pillar one three pieces of information really stood out for me. I feel these three facts really represent what pillar one stands for. Firstly, the highest returns are obtained by accepting prudent
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Focuses on the various legs of the finance industry. Bernstein dedicates a chapter to brokers, mutual funds, and the press which is the three legs that he feels makes up the finance industry. The author dedicates a chapter to broker sand says they should be avoided if possible. The one thing Bernstein wants us to know is that your broker is not your friend. He also wants you to know that your mutual fund is not your friend either. Many investors unknowingly pay huge fees because they are heavily invested in high fee mutual funds. It is important that investors research the fees that are associated to the mutual fund. Bernstein suggests that investors look at index funds rather than mutual funds due to their low fee structure. They are also a good idea because they allow you to easily diversify your investments. Bernstein says that by indexing, you are tapping into into a powerful resource in the finance world, you are tapping into he collective wisdom of the
What are the major reasons investors purchase mutual funds as reported to the Lawrences by the Financial Advisor?
By focusing on only one risk, for example peer risk, it leaves the company up for even more risk in its assets and pension obligations. Figure 1 illustrates that these risks do indeed rely on one another. 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).
The first of the pillars is Containment. Containment was set forth to stop the spread of communism. Of all the pillars Containment was the most expensive. This was the pillar that created such institutions as NATO (North Atlantic Treaty Organization), CENTO (Central Eastern Treaty Organization) and SEATO (Southeast Asia Treaty Organization).
Bodie, Zvi, Alex Kane, and Alan J. Marcus. Essentials of Investments. Ninth ed. N.p.: McGraw, 2013.
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
Pike, Richard, and Bill Neale. Corporate Finance and Investment: Decisions and Strategies. Harlow: Pearson Education, 2009.
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.
To maximize optimum performance of our investment portfolio, we placed a certain percentage of equity in different sectors of the stock market.
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.
Finance is a field that had always fascinated me right from my undergraduate college days. What make me interested in this particular field of study are the art of finance and the complexity of investment market which would allow me to employ my personal skills, such as analytical and communication skills, along with my personal characteristics such as dedication and compassion for what I do. As one of the most important sector in the world, I believe it would provide me with a broad range of career options.
One can accurately state that the role of the competent and capable financial manager is figuratively worth its weight in gold. As global markets today's financial markets increase in complexity, the tradition of learning by doing will not suffice. The financial manager today must hit the ground running with ready expertise to be used effectively as the CFO or as part of a team of financial experts within the ranks of the CFO's office. In navigating the international marketplace effectively, financial managers find themselves in a technology driven, real time information deluge which helps them to satiate the knowledge demands of investors, commercial and investment bankers, shareholders, employees, brokers, traders et al who must know particular companies, their products and the markets wherein they operate. The financial manager is charged with providing the information necessary to fulfill this relentless demand for a range of financial information that literally runs the gamut.
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.
Bodie, Z., Kane, A., & Marcus, A. J. (2011). Investments. (9th ed.). New York, NY: McGraw-Hill/Irwin.
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.
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.