Determine the Optimal Investment Performance Appraisal Systems - Research Paper Example

This is considered as one of the first phase in understanding the performances of an individual, economic circumstances, desires and aims. The starting point of this situational profiling comprises of investigating the source of wealth, stage of life of the investor and volume of these sources of wealth. There are mainly two common sources of wealth for the individual investors. They are, (1) Wealth generated by entrepreneurial activity- wealth is created through this activity perhaps indicates knowledge of the investors and experience, by way of the risk-taking judgment. (2) Wealth accumulated all the way through inheritance or one-time windfalls or accumulation of wealth over a long period of safe job- Wealth is acquired through this way indicates that individual has less knowledge about risk-taking activity.

“Terminologies vary, but for practical purposes we can consider the individual investor to be either affluent or high net worth. “For the affluent investors, the total economic resources are of roughly the same magnitude, as they claim on those resources resulting from the investors’ life choices” (Torre & Rudd, 2004, p. 2). Those choices normally consist of a need for post retirement expenses, the purchase of homes and the educational expenses of kids. When the investor is middle aged or young, fiscal activities normally symbolize the smaller part of his whole resources, with human assets and real estate possessions representing the bulk of his possessions.

“Traditional finance assumes that all investors exhibit three major characteristics, such as, 1. Risk aversion- Investors minimize risk for a given level of return or maximize return for given level of risk. 2. Rational expectation- Investors. The paper demonstrates that evaluating performance presenting it fairly is vital to the energy of an investment firm. Portfolio managers and security analysts create decisions under circumstances of uncertainty concerning the relative attractiveness of individual investments and market sectors; the function of performance analysts is to explain the result of those decisions.

Portfolio management is the art and science for making decision in terms of investment mix and policy, achieve the objective of investors, by investing asset for individual or institutions. Portfolios defined as “a collection of investments all owned by the same individual or organization. These investments often include stocks, which are investments in individual businesses; bonds, which are investments in debt that are designed to earn interest; and mutual funds, which are essentially pools of money from many investors that are invested by professionals or according to indices”.

It is constituted to achieve a level of expected return with lowest risk possibility. The portfolio management has been involved with new product development and innovate projects to achieve maximum profit. In the sense of modern portfolio it is professionally constructed strategy for investment to achieve more growth from a nominal amount of capital. It defined as “Overall investment strategy that seeks to construct an optimal portfolio by considering the relationship between risk and return, especially as measured by alpha, beta, and R-squared.