Portfolio Choices for Retirement - Essay Example

Portfolio Choices for Retirement By Finance and Accounting of Analysis of portfolio choices from a behavioural perspective This study has considered various portfolios in the calculation of standard measures such as the rate of return of assets, gains and losses among others. Some of the portfolio assets used in the excel computation are as follows. Name of Company Share Price per share Gain/loss Micron Technology 27.43 2.64% Microsoft Corp 41.55 3.11% Halliburton Co 45.88 4.37% Intel Corp 31.04 0.75% Coca Cola 41.17 1.20% Apple Inc 127.35 1.62% Denbury Resources 8.79 12.12% Rite Aid Corp 8.84 0.57% Sprint Corp 4.97 2.47% Source : http://finance.yahoo.com/ These company shares are of immense significance in discussing the aspect of portfolio choice based on a behavioural perspective. As a point of departure, majority of investors both individual and companies make investment decisions on the noticeable social-demographic variables for principal psychosomatic processes, which propel investment options. Embracing this criterion explains the ignorance of the covert heterogeneity amongst investors. This is attributed to their preferences and convictions, which form the fundamental drivers of their conduct. In essence, the investors driven by the urge to safe for retirement face fewer risks and earn less turn over compared to those that are driven by goals that relate to speculation. In addition, these investors have high ambitions (MARSTON, 2011). In essence, the objectives of the investors directly affect the portfolios that they choose and the returns earned. Essentially, the recipe of increased personal responsibility for retirement and an aging populace has contributed of an upward number of individuals to become accountable for their won future financial obligations. According to DARST (2013), the attributes such as age, gender and channels through which transactions are made are consistent in their fundamental psychological processes and the influence attributed to the decision making (SHARPE, 2008). In line with the behavioural portfolio analysis, the portfolio size puts importance on the additional motives to trade apart from rebalancing and consumption-related liquidity. Some of these motives include the following Probability weighting and reference results, which include profits and losses The state of ambiguity repugnance Status quo The disposition effect Lack of diversification Inadequate saving due to lack of self-control The behavioural Euler equation y = [xt –xt-1] offers a n explicit explanation on how a particular asset is captured and full optimization is obtained in line with the consumptions saving option which arguments the additional attributes. Fort instance, a particular term captures the result of the marginal analysis and capitalizes on it ensures that the implication of the psychological perception the investor undergoes through from the worthiness of his portfolio at diverse points in time. This trend goes a long line to the determination of the capture realization. Considering the aspect of preference: evaluation Utility and realization Utility, it is realized that the stylized thought process which determines the investor’s decision regarding a security at time t. This ensures that a balance of benefits is reached from among the traders and holders. In essence, the neoclassical condition. This increase in future and wealth protection forms the foremost benefit that an investor attaches his conscience when selecting the kind of portfolio to invest. The investor considers the determinants of analysis utility and realization utility in making decisions, and this satisfies the behavioural theory. The foremost necessity of evaluation utility is the emotional experience, which is attributed to the holding of a position in a security. The examples of the utility variables, which define the evaluation utility, include the security-potential function, which is attributed with the losses and gains. It is imperative to note that the psychological processes of an investor are guided by a series of factors, which help in making the ultimate decisions concerning the nature of the investment to make. The psychological behaviour as illustrated in this study is a foremost tool in defining the trend in which various assets are determined for investment. As seen in the assets trends above, the gain in the market share pricing is primary consideration of the type of asset to invest in. This consideration is guided by the desire to save in profitable assets such that in the end it can yield adequate gains that can benefit a retired individual (CONNOR, eat al, 2010). When investment in such shares is done and it turns out to be satisfactory to the investor in terms of gains made, then the process of psychological considerations is during investment is successful. The assets considered in the set discussed indicate psychological logic considerations and this satisfies the behavioural theory. In essence, the behavioural consideration in investing in the assets listed able satisfies the essence of saving for retirement (SHARPE, 2008). There should be gains. Evaluation of the asset allocation adopted applying portfolio theory Investing for retirement is regarded as a multifaceted human cognitive procedure, which involves decision making as pertains to probable uncertain future returns on the asst invested in. The process of investment analysis involves numerous fundamental analytical criteria portfolio theory and risk evaluation among others. In this case, the portfolio theory will be considered. The following formula is used to calculate the rate of return of the listed assets Rate of Return = End Portfolio Value/ Begin Portfolio Value * 100 = Return (%) Consider the following table indicating the rate of returns of the nine portfolios Name of Company Share Beginning value of portfolio Matrix End Value of Portfolio Rate of Return Micron Technology 1000000 a 1000957.99 0.0958 Microsoft Corp 1000000 b 1000452.82 0.0453 Halliburton Co 1000000 c 1,001, 487.67 0.1486 Intel Corp 1000000 d 1000371.38 0.0371 Coca Cola 1000000 e 1000432.19 0.0432 Apple Inc 1000000 f 1000780.08 0.0780 Denbury Resources 1000000 g 1000920 0.092 Rite Aid Corp 1000000 h 1000604 0.0604 Sprint Corp 1000000 i 1000640.17 0.0640 The portfolio assets as indicated in the table above performed relatively well because in all the assets selected only gains are recorded. The rate of return recorded for the portfolio is impressing and this gives hope for those individuals who save for retire. As discussed earlier in this study, saving for retirement needs to be less risky and more profitable. From the physical assessment, behavioural portfolio perspective can be embraced. This is because, an individual can easily identify the assets in which he hopes to yield high rate of return. In analyzing the pattern of these portfolio assets above, the element of the correlation is observable (BRENTANI, 2004). This can be ascertained by the calculation of the correlation matrix as follows Correlation matrix = 1 a b c d e f g h i a 1 j k l m n o p q b c 1 r s t u v w x y c d e 1 z a b c d e d e f g 1 f g h i j e f g h i 1 k l m n o f g h i j 1 p q r s t u g h i j k l m 1 v w x y z h i j k l m n 1 a b c d e f i j k l m n o 1 g h i j k The five portfolio assets selected are as follows Name of Company Share Beginning value of portfolio order End Value of Portfolio Rate of Return Micron Technology 1000000 30% 1000957.99 0.0958 Microsoft Corp 1000000 20% 1000452.82 0.0453 Halliburton Co 1000000 35% 1,001, 487.67 0.1486 Denbury Resources 1000000 25% 1000371.38 0.0920 Rite Aid Corp 1000000 15% 1000432.19 0.0432 Expected Portfolio return = 0.4249/ 5 = 0.08498 Standard deviation = square root of variance Variance= 0.00917764+ 0.00205209 +0.02208196 +0.008464 + 0.00186624 /5 = 0.008728386 Standard deviation = square root of 0.008728386 Standard deviation = 0.09342583154 Sharpe ratio = Effective return / standard deviation = 0.08498/ 0.008728386 = 9.7355 The correlation in the 9-set portfolio asset is positive relative to the gaining trend of the share price. Similarly, the correlation of the 5-set portfolio assets are positive relative to the market share price. In essence, the consideration of the correlation in both cases is helpful since it helps in determining the movement of the share prices from the beginning to the end. Moreover, as indicated in the table, the prices moved upwards and this is a sure indication that this arrangement of investment is fit for those individuals planning to save for retirement. It is imperative to note that, the nature of correlation as seen in the correlation matrix is helpful to individuals who need to select the type of assets to invest in (BONHAM, 2005). The aspect of diversification is critical when selecting the type of assets to invest in. It is advisable to select assets wisely from a wide range of combinations to ensure that the assets have both positive and negative correlation. The aspect of non- correlation of assets is beneficial when selecting assets for investment because it helps in selecting diverse assets. This reduces the risks attributed to market share investments (DUFFHUES & RENNEBOOG, 2006). In conclusion, the aspect of portfolio asset selection for retirement need to be undertaken carefully because of the less risk needed and high returns. This implies that, the correlation coefficient and diversification skills needs to be applied accordingly to ensure that convenient permutations of is selected. List of References BONHAM, S. S. (2005). IT project portfolio management. Boston, Artech House. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=127774. BRENTANI, C. (2004). Portfolio management in practice. Oxford [England], Burlington, MA. http://site.ebrary.com/id/10128002. CONNOR, G., GOLDBERG, L. R., & KORAJCZYK, R. A. (2010). Portfolio risk analysis. Princeton, Princeton University Press. http://public.eblib.com/choice/publicfullrecord.aspx?p=485759. DARST, D. M. (2013). Portfolio investment opportunities in managed futures. Hoboken, N.J., Wiley. http://oclc-marc.ebrary.com/id/10677858. DUFFHUES, P. J. W., & RENNEBOOG, L. (2006). Advances in corporate finance and asset pricing. Amsterdam, Elsevier. http://site.ebrary.com/id/10138473. HERBST, A. F. (2002). Capital asset investment: strategy, tactics & tools. New York, J. Wiley. MARSTON, R. C. (2011). Portfolio design a modern approach to asset allocation. Hoboken, NJ, Wiley. http://www.books24x7.com/marc.asp?bookid=43267 SHARPE, W. F. (2008). Investors and markets portfolio choices, asset prices, and investment advice. Princeton, N.J., Princeton University Press. http://site.ebrary.com/id/10367295. Read More