Invetment bearing Securities & their role in Portfolio Essay

For example, stocks traditionally have a potential for higher return than bonds over time because stocks are usually a riskier investment than bonds.

Advisors and investors would do well to pay as much attention to the expected volatility of any portfolio or investment as they do to anticipated returns. Moreover, all things being equal, a new investment should only be added to a portfolio when it either reduces the expected risk for a targeted level of returns, or when it boosts expected portfolio returns without adding additional risk, as measured by the expected standard deviation of those returns. Lesson 2: Don’t assume bonds or international stocks offer adequate portfolio diversification. As the world’s financial markets become more closely correlated, bonds and foreign stocks may not provide adequate portfolio diversification. Instead, advisors may want to recommend that suitable investors add modest exposure to nontraditional investments such as hedge funds, private equity and real assets. Such exposure may bolster portfolio returns, while reducing overall risk, depending on how it is structured. Lesson 3: Be disciplined in adhering to asset allocation targets. The long-term benefits of portfolio diversification will only be realized if investors are disciplined in adhering to asset allocation guidelines. For this reason, it is recommended that advisors regularly revisit portfolio allocations and rebalance

According to the CAPM model:R_i=α+βR_m+ε, α represent the abnormal return gained by the portfolio. If the market is efficiency, the α has to be zero.

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

Also edited by Greg N. Gregoriou ADVANCES IN RISK MANAGEMENT ASSET ALLOCATION AND INTERNATIONAL INVESTMENTS DIVERSIFICATION AND PORTFOLIO MANAGEMENT OF MUTUAL FUNDS PERFORMANCE OF MUTUAL FUNDS

Corporate bonds have had a long thriving history in the fixed income market. The first corporate bond issued dates back to the construction of railroads after the conclusion of the Civil War. Increasing in popularity each year, the corporate bond issuance rate has been on a steady incline with daily trading in the billions. Corporate bonds are very complex but simple enough to where everyone can increase their wealth by investing in them. Essentially corporate bonds are debt that a company issues to the investor. Issued by either a private or public company, companies use these funds to build facilities, buy equipment and/ or expand their business. These businesses are typically public utilities, transportation companies, industrial

Bonds: Also known as fixed income securities. Purchasing bonds generates a fixed income inform of interest to be received from the company on a semiannual or annual basis.

Inflation Risk. The bondholder will lose money on the investment due to the diminsihing of the purchasing power of the proceeds. The rate of price increases in the economy deteriorates the returns associated with the bond, which has the greatest effect on fixed bonds.

The propriety models underpinning our Optimal Market Portfolio incorporate more than 40 global asset classes and 200 asset sectors, resulting in a portfolio diversified based on sources of risk and return. Ongoing multi-factor risk analysis is performed on the portfolio to help minimize overexposure to any specific risk, such as U.S. equity risk or interest rate risk. Our research suggests that properly diversifying a portfolio’s sources of risk and return and not simply adjusting an allocation between stocks and bonds is the key to long term portfolio outperformance.

characterize the risk and return features of these investments  Determine the expected return and risk of portfolios that are constructed by combining risky assets with risk-free investment in Treasury bills  Evaluate the performance of a passive strategy

Risk and return are the fundamental parameters of any investment. While some investments may present greater risk they are countered by a higher rate of return. The vice versa holds true as well, less risk corresponds to a lower return. One way to measure risk is through calculating the standard deviation of returns. This measurement tells an investor how volatile or risky an investment is, by providing the investor with a range of possible outcomes based on the stocks expected return. Therefore, the lower the standard deviation percentage the less risk a given investment has. Moreover, when risk is being analyzed for more than one investment in a portfolio, a correlation of returns measurement is used. This calculation determines whether or not the investments respond similarly (+1) or conversely to market changes (-1). The closer the correlation is to -1 the more diversified the investment is resulting in less risk (Hirt, Block & Basu, 2006). Combined, these measurements provide investors with the tools necessary to analyze an investments risk and determine the best investment choices.

Trading in bonds has a number of risks which must be considered before investing. The rise in interest rates is the most feared risk in bonds which can even lead to loss of some or all of the investment value. It must also be borne in mind that investment in bonds that are not government-guaranteed has some risk considerations since the return on investment has a direct relationship the bond’s credit and changes in the market. On the other hand, investments that have low risk factors have lower returns. Bonds range from the U.S Treasury securities that are secured by the government and have no risks to the speculative ones whose rating is below investment grade. The most important thing when investing in bonds is to forecast and measure whether the investment will be available at a later date when it will be needed.

Diversification is worth more than a word. It works on reducing the total risk of a portfolio with different asset types. But what contributes to the success of portfolio diversification? A large size of portfolio? A variety types of asset allocation? Adding international investment? Numerous of risk factors? They are all indicators of a well-diversified portfolio. But it is hard to achieve a perfectly diversified portfolio in reality because you cannot diversify all types of risk. Following, we will discuss about the advantages and disadvantages of diversification in portfolio management under circumstances. On one hand, some mention that dynamic and numerous asset allocations in the portfolio will reduce idiosyncratic risk and some level of market risk. While some also suggest benefit exists of introducing multi-factor pricing models to cover different risk factors. On the other hand, arguments arise demonstrating adding international investment may disappoint investors because foreign markets could be correlated and moved together in a global world. Another disadvantage further defined will be the correlated asset allocations weaken the effect of diversification. At the end, conclusion will be drawn to support the useness of diversification.

To identify the corporate bonds that are relevant for research, the following criteria are applied in this study:

Capital Market is a market where long term securities are traded. It is a place from where the business sector will fulfill its demand for long