Investing in Apple and Microsoft and Modern Portfolio Theory - Essay Example

Investment Question Modern portfolio theory enables managers to understand the of risk reduction by offering method of diversification. However, the theory has been utilized in the investment industry for 60 years and has ceased to be of value. The limitations of modern portfolio theory outweigh the risks, and the world of investment has changed after six decades since the introduction of the theory. While modern portfolio allows financial managers to confront risks when making an investment, the theory does not put into consideration the attitudes of individual shareholders. Shareholders are the biggest players in any investment and their attitudes towards risks cannot be ruled out. Modern portfolio theory fails to incorporate the needs of all shareholders and uses a single set of shareholders resulting in an unrealistic indifference curve in the modern world. A period of 60 years calls for appropriate adjustments to the practical aspects of the theory. However, the modern portfolio is anchored in a single time period that is used to risks and returns scrutiny. Financial managers are assessed through a series of successive time periods as opposed to the proposition of a single period from modern portfolio theory. Additionally, a single period cannot be used for any meaningful predictions on returns. Therefore, Modern portfolio theory does not cover all the components required to come up with investment strategies for risk reduction. Question 2 Investing in Apple and Microsoft shares on an equal basis is misguided because the companies have different financial prospects. Microsoft has a higher growth potential than Apple. The 50/50 basis would create a tolerance risk, but it would not realize much returns when compared to when clients invested more money in Microsoft than Apple. The valuation and expected growth for Microsoft will grow considerably because of the popularity of its operating systems and smartphones worldwide (Tilson and Heins, 2011). The clients should also track the stock prices of both companies to check earnings per stock in the last five years. EMH suggests that an investor should assess both historic and current patterns of share prices. Additionally, technical analysis would allow the clients to track share price movements for each company. An increase in the shares prices of either Apple or Microsoft should be reflected in the way they invest their lottery jackpot. Therefore, based on the potential of growth for Microsoft and Apple’s share price performance, a 70/30 investment in favor of Microsoft would realize more returns. The investment is represented in the portfolio below; Figure 1; Portfolio for Apple and Microsoft share investment Question 3 The following is a critical assessment of invalidity of technical analysis in portfolio management. The invalidity of the Technical Analysis stems from the direct challenge to Efficient Market Hypothesis theory. While empirical evidence has ruled in favor of technical analysis in terms of the history of stock prices, efficient market hypotheses offer a broader approach to the subject of portfolio management. Technical analysis propositions offer past and future share price information, but they do not provide the public with adequate company information. An individual investor requires comprehensive details about the performance of the company that will be responsible for using his or her money for profitable operations. The way a company responds to the market should be known in advance. Technical analysis does not anticipate economic pressure because it capitalizes on supply and demand only to predict future trends. The efficiency of the financial markets is the backbone of portfolio management for investors. Technical analysis predicts the future while the EMH provides information that can used make prospects but based on the prevailing market price. The predictions require rapidity and accuracy which technical analysis does not provide. Therefore, financial managers should use methods that provide practical aspects of making worthwhile investments. Question 4 London has introduced new regulations that have changed the investment platform. The regulations have also been implemented globally leading to the global financial crisis. The capital markets of London have failed to provide definite information about equities, shares and stocks. It has become complicated for investors to make any predictions based on past historical financial information on the markets. Making fundamental analysis is not possible because the information about companies selling shares and the way the industry is responding to fluctuations in stock and share prices is not available. The efficient market hypothesis suggests that a global efficient market should have relevant information about share prices to make future predictions based on the current market prices. Countries are ending up making investments blindly leading to financial crisis. London and leading global economies have a great debt in terms of income and capital repayment. Additionally, the economies have failed to create stable inflation and interests rates in the market leading to poor performance with currencies and loss of confidence in the investment market in general. The remedy does not lie in historic patterns of share or stock prices but in implementing regulations where states can read from the same financial script and end the prevailing crisis. Question 5 The use of Financial Transaction Tax (FTT) attracts both criticisms and appreciation because of the potential solutions and implications it brings to the financial markets. FTT will be used for the evaluation of systematic risk. Capital Asset Pricing Model allows investors to weigh the risks of investing in shares. Tackling systematic risk is vital for an investor or global economies that are looking for lasting solutions to financial crises. As financial stability continues to be elusive, FTT will allow assessment of price volatility for shares, stocks and bonds with respect to the changes in the economy performance at play. FTT will decrease investment ability and overall efficiency in the financial market. Companies and potential investors engaging selling and buying shares as well as bonds will bear the greatest burden when compared to the share the government will cater for in the market. Therefore, FTT will be an impediment in the financial markets as opposed to the prediction that it will be an avenue for providing economies with extra revenues. The economy will introduce regulations that will increase the likelihood of systematic risk. High inflation rates and lack of confidence in share, currency, and bond investment will be inevitable in the affected economies. Corporations and investors are the key players in the financial markets. CAPM theory holds that any increment in the beta factor increases the level of risk for a certain investment. FTT will increase the beta factor and discourage investors and corporate firms to avoid entering into the market for fear of getting low or zero returns. Economies are likely to face a low growth rate and increased employment levels. Question 6 New York, London, and Tokyo will survive the coming decades. The global market will feature economies that will come up with the best strategies to stabilize currencies, commodity prices and reduce the capital repayment for debt and equity. The balance of trade in the leading world economies has upset the financial stability in the world and economies are left to fight for investment plans that work best for their economies. Hardly will any key player in the financial market adopt the Arbitrage Pricing Theory because there will be no returns or risks for zero investment. Therefore, a well-to-do player will be required to assess the financial and non-financial assets in the economy and make a comparison with the rivals to stay afloat. CAPM suggests that investors should assess the macroeconomic foundations to become aware of the returns and risks in the event they inject their money in either shares or bonds. Due to the prevailing financial crisis in the global market, survival tactic will include players evaluating all the systematic factors to reduce loss risks. Lessons have been learned and hardly will New York, London, Tokyo or budding economy target non-beneficial platforms. The new players will amplify the level of competition in the investment sector and offer new approaches in the way old players have perceived returns and risks on investment. Question 7 Investment managers should give more consideration to the JM Keynes quotes due to the failure of EMH. EMH has not taught investment managers how to make relevant mathematical speculations regarding investment options. EMH limits the power of the shareholders and amplifies the view of the investors towards risks. Additionally, efficiency expected in the future is not possible because EMH does not teach creative accounting. An investment manager is a decision maker who must remain optimistic guided by the numbers related to market efficiency. JM Keynes proposes an assessment of quantitative benefits and probabilities as a method of dealing with financial instability. Investment managers are incapable of making timely decisions based on the timing of the financial policies. The benefits and probabilities will help managers based their decision on market efficiency realities other than assumptions. EMH limits the scope that managers can cover. Benefits and probabilities must be based on comprehensive factors such as economic forecasts, company reports and announcements and reports from the financial industry. Timely action is inevitable for investment managers as JM Keynes suggests. EMH limits its lessons to public knowledge, past and present share price patterns and company information. The theory fails to suggest the action that every manager should in their capacity as key decision makers. Stability will be achieved faster if proper action is taken guided by the current market information. Reference Tilson, W. and Heins, J. (2011). Why Microsoft Is a Smarter Investment Than Apple These Days. [online] www.kiplinger.com. Available at: http://www.kiplinger.com/article/investing/T052-C017-S001-why-microsoft-is-a-smarter-investment-than-apple-t.html Read More