Impact of Trade on Portfolios - Assignment Example

Discuss the trade that had the highest, lowest, and most volatile impact on your portfolio value Often investors mistakenly base the success of their portfolios on returns alone. Only a few consider the risk that they took to achieve those returns. A lot of investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Taking into consideration all those factors, CSCO Company had the greatest impact on the portfolio value. Execution costs calculate the difference in value between an ideal trade and what was actually done. The execution cost of a single completed trade is mainly the difference between the final average trade price, plus commissions, fees and all other costs, with it a considerable benchmark price covering a hypothetical perfectly executed trade. Normally the sign is taken so that positive cost represents loss of value: usually buying for a higher price or selling for a lower price. If a trade is not completed either for internal reasons say the price moves away from an acceptable level or for external reasons say a trader gets sick or maybe a system fails, therefore some value must be assigned to the shares that have not been executed. The cost of a portfolio transaction, or a multiple of transactions, usually is computed as a suitably weighted average of the costs of the individual executions. Some of the costs of trading are direct and predictable, things such as broker commissions, taxes, and exchange fees. Even though these costs can be of importance, mostly they are commonly not included in the quantitative analysis of execution costs. All “Indirect” costs include all other sources of price discrepancy, for example limited liquidity that is market impact and price motion due to volatility. All these are much more difficult to characterize and measure, and are much more susceptible to improvement. Considering that the technology of cost measurement is most advanced for equity trading, cost measurement for other asset classes is very interesting but less developed. Mainly the benchmark is commonly taken to be the arrival price, that is, the quoted market price in effect at the time the order was released to the trading desk. By using that benchmark it is similar to saying that a perfect trade, especially one with zero execution cost, would be one that executed instantaneously at the arrival price. The cost measured using the arrival price benchmark is called the implementation shortfall. Usually the execution costs can be negative, for example, if the price dropped in the course of a purchase program and the asset was bought for a lower price than planned; or in the above example, if the benchmark price were the day’s close. The forecast execution costs on any particular order typically have a very high degree of uncertainty, due to market volatility and other random effects. A well-measured model for execution costs is an important part of the quantitative investment process. At a minimum, it is a tool for the portfolio manager to evaluate the performance of his or her trading desk and external brokers: were the results achieved on a particular execution compatible with the costs estimated from the prê-trade model? Furthermore, anticipated transaction costs should be a component of the portfolio formation decisions: turnover should be minimized, and expected transition costs should be incorporated in the portfolio construction model along with expected alpha. The use of transaction cost models in investment management. This is divided into three parts, corresponding to the order in which the three aspects should be addressed in designing an investment process, even though the order is reverse chronological from the perspective of a single trade. ADSK Company had the lowest impact on the portfolio value. Clearly the value on the execution cost does not have any significant effect on the portfolio value of investments. The risk taken for investment and the return on investment did not have much effect on the portfolio value. Plug company was the most volatile in terms of portfolio value .The jagged lines on charts reflecting on tracking stock prices, it means that prices fluctuate throughout the day, week, month, and year, as demand goes up and down in the markets. Short-term fluctuations as the stocks price moves within a certain price range, longer-term trends over months and years, in which that short-term price range itself moves up or down. The measure of size and frequency of these short-term fluctuations are known as the stocks volatility. If for a stock it has a relatively large price range over a short time period, it is mostly seen as highly volatile and may expose the investor to increased risk of loss, most especially if it is sells for any reason when the price is down. Even though there are exceptions, growth stocks tend to be more volatile than value stocks. In contrast, range of prices is relatively narrow over a short time period, a stock is considered less volatile and normally exposes you to less investment risk. But reduced risk also means reduced potential for substantial short-term return since the stock price is unlikely to increase very much in that time frame. Stocks tend to become more or less volatile over time. In one example, there might be a newer stock that had formerly experienced big price swings, but then becomes less volatile as the company grows and establishes a track record. A further example would be that a stock with a traditionally stable price that becomes extremely volatile following unfavorable or favorable news reports, triggering a rash of buying and selling.  In other words, volatility is simply a measure of dispersion around the mean or average return of a security. Away to measure volatility is by using the standard deviation, it tells you how firmly the price of a stock is grouped around the mean or moving average (MA). Mostly, when the prices are tightly bunched together, the standard deviation is small. When the price is spread apart, there is a relatively large standard deviation. A strong relationship exists between volatility and market performance. As volatility declines, the stock market tends to rise and increase as the stock market falls. As volatility increases, risk increases and returns decrease. Risk is represented by the dispersion of returns towards the mean. The greater the dispersion of returns towards the mean, the larger the drop in the compound return. Volatility works well to help identify market bottoms on high volatility. For long-term investors, it also does a very good job of helping to identify that the stock market is at or near a top, even when volatility is very low. It is important to remember that this indicator is not intended to time the exact top, but rather that the volatility of the market does not stay substantially below the mean for a long period of time. As volatility increases, then the markets performance will tend to decrease. The high volatility that normally comes with bear markets has a direct impact on portfolios. Plus it also adds to the level of concern and worry on the part of investors as they watch the value of their portfolios move more violently and decrease in value. This causes unmediated responses which can increase investors losses. While an investors portfolio of stocks declines, it will likely cause them to rebalance the weighting between stocks and bonds by buying more stocks as the price falls. Investors can use volatility to help them buy lower than they might have otherwise. Work Cited Capital IQ Market Watch: http://marketwatch.com/ Yahoo finance: finance, yahoo.com Wall street journal: www.wsj.com Read More