“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.”
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.
We believe that our portfolio will maximize our returns while assuming a relatively low risk. Although stocks are extremely risky, we will diversify our stocks and will limit buying and selling. Rather than constantly trading stocks in order to seek a high return, our strategy as a passive investor is to purchase stocks we believe will increase while they are trading at low prices and hold on to them for a significant period of time. Some stocks that may be beneficial to our portfolio include Palo Alto Networks Inc. (PANW), and Mastercard Incorporated (MA), Intel Corporation (INTC). By implementing this strategy, we are optimistic that our portfolio will grow at a steady rate over time. While we find investing in stocks appealing, we have also made the decision to invest in mutual funds because it offers diversification, is professionally managed, aligns with our passive investing style, and have the potential to yield high returns. For example, one mutual fund that may add value to our portfolio include First Eagle Global Fund (SGENX) whose top holdings include Oracle, Comcast, and Microsoft. As stocks and mutual funds bring a significant amount of risk, adding bonds to our investment will allow us to earn a return with a low risk. While our portfolio is primarily focused on stocks and mutual funds, allowing 15% of our portfolio to consist of bonds will provide us with a safe investment.
Internationally, the flow of capital across national borders and into markets once believed to be impregnable is occurring at the speed of light. Technological innovation, accessibility to international market economies, and increased globalization has expanded the universe of securities available for investments and more importantly portfolio diversification. The developments mentioned above questions traditionally accepted principles by investors who believed that investing solely in U.S. securities would result in a better risk-return tradeoff. Prudent investors have known that diversifying across industries and markets will lead to a given level of expected return at a significantly lower level of risk, and vice versa. However, the advantages of such diversification are limited due to the same cyclical economic fluctuations that all assets (or companies) in a particular country are exposed to.
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.
A bond is debt to whoever sells the bond to an inventor. If you buy an IBM bond, you are loaning money ($1000) to IBM instead of a bank loaning money to them. Just like a bank, you are going to charge IBM interest on your money, as well as a return of principle when the loan is due (ten years later). The company does not go to the bank to borrow the money, because the bank will rate the company as a high risk company. Hence, banks are really tight with their money. High yields bond investment relies on an credit analysis in that it concentrates on issuer fundamentals, and a "bottom-up" process. It focuses more on "downside risk default and the unique characteristics of the issuer. In a portfolio of high yield bonds,
The stock market offers attractive opportunities of investment in various securities. These attractive opportunities encourage people to save more and invest in securities of corporate sector rather than investing in unproductive assets such as gold, silver, etc.
For organisations operating in unpredictable and competitive markets, it becomes a challenge for fund managers to create an optimal investment portfolio for their companies and their clients. Fund managers are presented with various prospects in emerging markets, equities, real estate, corporate bonds, government bonds, hedge funds, financial derivatives, and other alternative investments options. With such a diverse investment market, it becomes increasingly complicated for fund managers and other investors to shape, manage and monitor investment portfolios. This report presents a discussion on the future strategic asset allocations which
Investors often struggle to understand the complex dynamics driving prices higher or lower from day to day. Learning how these factors shape certain trends underpins the foundation of a well-constructed portfolio. By and large, this requires a diverse selection of selection of stocks and bonds in different industries and at varying levels of market capitalization.
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
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.
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
Using the stock market to invest in securities can be risky but with a little research and a carefully thought out investment strategy the road to financial security can be successful. Portfolio selection is a critical step in the investment process when deciding on which securities and stocks to purchase. When investors are selecting securities for a portfolio, the risks and returns must be considered for each individual stock in addition to the risks and returns for the portfolio as a whole. When looking at stock risks, both beta and unsystematic risk should be taken into consideration. When high return stocks have a beta greater than one, this means these stocks are highly volatile in comparison to the overall market and prove to be more risky. Stocks with high unsystematic risk are likely to have changes in stock prices. It is recommended to continue diversifying the stock selection and the allocation of funds to avoid industry risks, or beta. Industry risks often affect all stocks in a given industry. It is also recommended to continually evaluate the company’s investment portfolio as market conditions and future trends can sometimes be unpredictable. In the event that the economy becomes unstable and the
To identify the corporate bonds that are relevant for research, the following criteria are applied in this study:
The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.”