Benefits And Drawbacks Of Rubber Plc

1525 WordsDec 15, 20147 Pages
Rubber Plc has three different strategies to consider for investing their excess funds. The first option suggests investing in high-risk shares, the second suggests focusing on the standard deviation of different components, and the third advises the company to inspect historic trends in order to gain future insight. This paper will analyse all three special strategies, aiming at the potential benefits and drawbacks that each may have on the future performance of Rubber Plc. Option A entails investing the excess funds into aggressive shares, which are shares that have a Beta that is greater than 1. Beta, which represents volatility, is a measure of the covariance between the returns on a specific share and the returns on the market as a…show more content…
There is great potential for large returns when investing in high-risk, aggressive shares, but there is no guarantee. As there are not many aggressive strategies that will work in every market, a maximum point could be selected that would lead to either the re-evaluation or liquidation of the investment when reached. Rubber Plc should also consider their investment time horizon– the longer the better when it comes to investing in aggressive shares. The preference for an extensive investment horizon is due to the fact that it will enable them to endure market fluctuations better. Since this type of investment is likely to be much more volatile, demanding more frequent alterations to adapt it to changing market condition, it requires a more active management rather than a conservative, buy-and-hold approach. The CAPM (Capital Asset Pricing Model) can be used by Rubber Plc to price the portfolio; it helps calculate risk and what type of return to be expected from the investment. The general idea behind the model is that investors should be compensated for their time value of money along with their risk. The model is described in this formula: expected return = risk free rate + Beta * (expected market return - risk free rate) If the aggressive shares have a beta of 1.5, for example, for every 10% increase in the market index return, the share return will increase by 15%. However, if the market return falls, then
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