Portfolio Theory dictates that an investor buys specific stock with the intention of realising a short term profit by selling the stock at a higher price. It is accepted that the that the investor is balancing the risk against the return on the investment. It is also given that…
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The above equation evaluates the return on a risky asset in terms of (a) its minimum compensation and (b) its potential risk compensation. Within the thinking on modern portfolio theory, the Capital Asset Pricing Model (CAPM) establishes the theoretical relationship between risk and return, where average expected investor return is determined by the average market return, as shown below:
β represents market sensitivity. An investor can, hence, estimate returns (r) by understanding β, the risk inherent in the stock, when only the stock’s history is considered. In a well diversified portfolio, though, the volatility of the individual stock has little influence on the portfolio’s overall performance. Empirical data gathered in investigations of CAPM, however, argues against the predictions of the model and this has largely invalidated many applications of the model.
Portfolio Theory is focused on investors. Two fundamental choices have to be made: what proportion of risky assets should be included in the portfolio; and asset allocation, which depends on the conservative or aggressive requirements of the investor.
The theory of diversification allows lower standard deviations and variances of returns within a portfolio. Additionally, the Efficient Market Hypothesis (EMH) suggests that the prices of assets fully reflect available information: the implication is that the market cannot be consistently outperformed, since future share prices cannot be predicted based on historical data (weak-form efficiency); share prices adjust immediately to all available information (semi-strong-form efficiency); share prices reflect public and private information (strong-form efficiency).
Diversification suggests two subsequent approaches to the management of the portfolio: active management requires the selection of stocks and the timing of the market, whereas passive management requires the purchase and long-term
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Financial Risk Management
Many financial and non-financial organizations currently report the significance of value-at-risk (VaR), a risk that calculates for possible losses. Domestic uses of VaR and other complicated risk measures are on the increase in many financial institutions, where, for instance, a banks risk group can set VaR limits, both probabilities and amounts, for fund management and trading operations.
With more than 300 years of expertise and history in banking, the organization operates in more than 50 countries and employs 140000 people (Barclays, 2012). The universal banking model of Barclay provides it with continuous competitive strength. Revenue earned by the bank remained resilient reflecting the strength of the customers of the bank and mixture of balance in their business.
Market analysis depends on the analysis of the global market, which is the foreign exchange market that involves the Eurocurrency markets and lending, international bond markets, international equity markets, and using the global capital market. The use of the mean is the first and most simple concept considered while investing.
The bank of America has its financial and banking services spread all over the world in 40 countries. Bank of America completed the acquisition of Merrill Lynch in 2008 to become one of the largest players providing wealth management services across the world.
According to a study conducted by the Wharton School of University of Pennsylvania, over the past thirteen years, pharmaceutical companies are as much as 50% riskier than the overall Standard & Poor's (S&P) 500. This is primarily attributed to the nature of the industry wherein any events, either positive or negative, are magnified and deemed to have a dramatic effect on shareholder value and brand equity.
Just like any analysis, the objective is to derive a forecast and profit from any future price movements. At the company level, it involves examination of its financials, management, business strategy and the competitive forces encircling the company.
There are various approaches to conducting a fundamental analysis; top down approach starts with the overall economy and works its way down to industry groups and then to companies.
The risks involved in the international business and investments are huge. Taking the recent example of the slump in the economic statuses around the world, the recession and the losses being incurred by the
It was because of this reason that the regulations such as Sarbanes Oxley were promulgated in order to make it mandatory for the organizations to have a certain degree of corporate governance mechanism within them. The failure of large institutions especially financial services
Expected Utility Theory and the Modigliani-Miller theory is also taken into consideration which explains that the financial decisions of a company do not have an effect on its value. The report has also focused on the
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