...Risk and Return Tradeoff Memo The construction portfolio process concludes to be very complex. Statistical past performance, industry knowledge, future potential and relying on insights that are personal are typically what analysts rely on within the market in order to arrive at the final list. Maximizing returns while minimizing risk is the goal every investor aims for. An evaluation of individual securities as well as risk return trade off within isolation and the risk return trade off contribution of the entire portfolio. The managing and constructing of a portfolio simulation outlining the fundamentals within the construction of the portfolio in regards to the risk return trade off as well as the relationship among investment performance and strategy will be the structure of this memo. Casa Bonita Ceramics has selected me as the treasury analyst to determine the best stocks and allocate company resources in order to construct a successful portfolio. My decision will be detailed within this memo of the simulation, communicate the Sharpe ratio in the relation it has to investment decision as well as give recommendations for organization changes in the investment strategy to improve the investment performance. Simulation Decisions Given the excess cash generated in the previous year, Casa Bonita is considering the invest $800,000 in the stock market. Eight stocks have already been chosen. Given the high return consideration without the risk of capital loss in sight, narrowing...
Words: 1147 - Pages: 5
...Beyoncé’s risk investment | AbstractA case study which taps into the high risk investment the American singer Beyoncé took to produce her fifth album in a non-traditional way. Reine Kolle (瑞丽) Student ID: 1120150914 | Beyoncé’s risk investment | AbstractA case study which taps into the high risk investment the American singer Beyoncé took to produce her fifth album in a non-traditional way. Reine Kolle (瑞丽) Student ID: 1120150914 | Beyoncé’s Risky Investment Overview As part of our curriculum education we were asked to find a short case study that we thought to be of an interest in investments. Thus, this paper will discuss concisely the Harvard case study; written by Anita Elberse and Stacie Smith (2014), on the American singer Beyoncé and how much of a business gamble her project really was. The reason I find this case to be of interest is because of its depth into risky decision making and the uncertainty of expected results in investment. The approach of this case study is an analytical approach. This approach does not identify problems but it examines the case in order to understand what has happened and why. Key word: risk-return tradeoff Case study In December 2013, music superstar Beyoncé is about to surprise her fans with the release of her self-titled album. The team at her company Parkwood Entertainment, which general manager Lee Anne Callahan-Longo described as "a management, music, and production company that is owned and at the highest...
Words: 900 - Pages: 4
...resources consistent with APA guidelines. Term Definition Resource you used Time value of money Is the idea that money available at a present time is worth a lot more then the amount that its is in the future due to the “potential earning capacity”. The core principle of finance is provided money is able to earn interest and any money received sooner is worth more. Investopedia - Time Value of Money - TVM. (2014). Retrieved from http://www.investopedia.com/terms/t/timevalueofmoney.asp Efficient market Is a market that prices will quicky respond when there is an announcement of any kind of new information. Textbook. Primary versus secondary market Risk-return tradeoff Agency (principal and agent problems) Market information and security prices and information asymmetry Agile and lean principles Return on investment Cash flow and a source of value Project management Outsourcing and offshoring Inventory turnover Just-in-time inventory (JIT) Vender managed inventory (VMI) Forecasting and demand management University of Phoenix Material Definitions Define the following terms using your text or other resources. Cite all resources consistent with APA guidelines. Term Definition Resource you used Time value of money Is the idea that money available at a present time is worth a lot more then the amount that its is in the future due to the “potential earning capacity”. The core principle of finance is provided money is able to...
Words: 3500 - Pages: 14
...found in a business, a company will use the principles and concepts that occur at the time (Emery, Finnerty, & Stowe, 2007, pp. 32-33). The concepts a business uses are as follows: “The Risk/Return Tradeoff,” “Diversification,” “Dollar Cost Averaging,” “Asset Allocation,” “Random Walk Theory,” “Efficient Market Hypothesis,” “The Optimal Portfolio,” and “Capital Asset Pricing Model” (Investopedia, 2010, p. 1-8). The Risk/Return Tradeoff concept is also known by another name. This name is “the ability-to-sleep-at-night-test.” Although some individuals can deal with the ups and downs of the financial market, some fear that they may fall off the ladder. With this, the investment’s risk will come into play. The company needs to decide how much risk will be necessary for them to be comfortable with their investments. The definition of risk in the investing world is the chance that in point of fact the return on the investment will be different from expected. Standard Deviation in statistics is the measurement used in this instant. In other words, risk means that there is a possibility of losing part or all of the original investment. So if this is the meaning of risk, then risk/return tradeoff means that there must be a balance between the lowest of risk and the highest of return (Investopedia, 2010). Diversification is another concept that the business uses. This is a technique that is used to mix a wide variety of investments that can be found in a portfolio to minimize...
Words: 952 - Pages: 4
...Risk and return will be very central terms in our analysis and it is essential that the reader clearly understands the meaning of each term and how assets with different payout structures can be compared. General utility theory suggests that the average investor is risk averse. Given the same expected return of two assets with different risks, he would prefer the one with less risk. (This assumption may not be perfectly true for all individuals in all situations, but for the investor community as a whole it is probably true). For an asset with uncertain cash flows and payoffs, which are normally distributed, the mean of the distribution will be the expected return while the standard deviation forms some kind of “risk”. Choosing the “less risky” asset therefore comes down to choosing the asset with the lowest standard deviation in its payout distribution. An investor could also approach the problem from the other direction, choosing among assets with the same risk and then choose the asset with the highest expected return. Risk is usually defined as the volatility of returns, measured by standard deviation. The variance of a portfolio depends not only on the individual variances of the as- sets, but also on the co-variances between the components of the portfolio. As an extreme example, a portfolio consisting of two securities – a long position in a stock and with an appropriately chosen position in a put option on the same stock – will have lower...
Words: 1289 - Pages: 6
...University of Phoenix Material Definitions Define the following terms using your text or other resources. Cite all resources consistent with APA guidelines. |Term |Definition |Resource you used | |Time value of money |one of the basic theories of financial management |http://smallbusiness.chron.com/define-time-value-money-| | |which states, the value of money you have now is |876.html | | |greater than a reliable promise to receive the | | | |same amount of money at a future date | | |Efficient market |Market where all pertinent information is |http://www.businessdictionary.com/definition/efficient-| | |available to all participants at the same time, |market.html | | |and where prices respond immediately to available | | | |information. Stockmarkets are considered the | | | |best examples of efficient markets...
Words: 280 - Pages: 2
...University of Phoenix Material Definitions Define the following terms using your text or other resources. Cite all resources consistent with APA guidelines. |Term |Definition |Resource you used | |Time value of money |The idea that money available at the present |investopedia.com | | |time is worth more than the same amount in the | | | |future due to its potential earning capacity. | | | |This core principle of finance holds that, | | | |provided money can earn interest, any amount of | | | |money is worth more the sooner it is received | | |Efficient market |The Efficient-market hypothesis (EMH) states |wikipedia.org | | |that it is impossible to "beat the market" | | | |because...
Words: 277 - Pages: 2
...particular investment philosophies. The Foundation faces financial decisions concerning not only how to use money today, but how to manage money and assets saved for later use. The methods used to save or invest this capital have a dramatic effect on the Foundation’s ability to achieve its mission in the future. Inflation constantly threatens to erode the future purchasing power of today’s savings. All investors must find ways to “put their savings to work,” seeking rates of return that compensate or overcome the effects of inflation and ensure adequate funds exist to meet future needs. First, investors must determine their goals. The wide variety of investment options available in today’s global marketplace offer varying levels of risk and return. Investors must approach these choices armed with a clear understanding of what they hope to accomplish, and the tradeoffs they will accept to achieve their goals. In general, the predominant tradeoff decision concerns risk and return. Investments that offer higher...
Words: 1735 - Pages: 7
...January 4). Retrieved May 5, 2015, from http://www.investopedia.com/terms/m/marketefficiency.asp | Primary versus secondary market | “Primary vs. secondary market says that the primary market deals with the newly issued securities while the secondary market deals with already traded securities. When the companies issue securities in the primary market, they collect funds directly from the investors through the securities sales. But, in the secondary market the money earned from selling a security does not go to the company. The money thus earned goes to the investor who sells the security.” | Primary vs. Secondary Market. (n.d.). Retrieved May 5, 2015, from http://finance.mapsofworld.com/capital-market/primary-vs-secondary.html | Risk-return tradeoff | “The principle that potential...
Words: 1375 - Pages: 6
...ANGELA FORNEY ASSIGNMENT 2 11/22/2012 KONWUFINE, ELIAS FINANCE 100 Lenders love to analyze ratios. It allows them to see how your business is doing and compare your business to other businesses they’ve loaned money to. But ratio analysis is a useful tool for the business owner too. How healthy is your business? Some basic ratio analysis will tell the story. Calculating these three financial ratios will let you check your business’s current temperature, diagnose potential problems, and see if your business is doing better or worse over time. 1) Current ratio The current ratio is an excellent diagnostic tool as it measures whether or not your business has enough resources to pay its bills over the next 12 months. The formula is: Current ratio = Current assets/Current liabilities Recall that Current assets are a category of assets on the balance sheet that represent cash and assets that are expected to be converted into cash within one year. Current liabilities are a category of liabilities on the balance sheet that represent financial obligations that are expected to be settled within one year. For instance, suppose a business has $8,472 in current assets and $7200 in current liabilities. Then the current ratio is $8,472/$7200 = 1.18:1. So for this business, the current ratio gives a clean bill of health. For every dollar in current liabilities, there is $1.18 in current...
Words: 2232 - Pages: 9
...Risk and Return LECTURE 2 Risk and Return Twin axioms of modern financial theory Fear • Risk averse • Degree of risk aversion Greed • Non-satiable appetite for wealth • Utility Risk Aversion • Behaviour when exposed to uncertainty • Risk attitudes: – Risk averse (or risk avoiding) – Risk neutral – Risk loving (or risk seeking) • Measurements: additional marginal reward an investor requires to accept additional risk – Absolute risk aversion – Relative risk aversion Utility • Satisfaction experienced when consuming a good • Expected utility theory deals with choices of risky projects with multiple outcomes Risk • Typically, investment returns are not known with certainty • Investment risk refers to the probability of earning a return less than that expected • The greater the chance of a return far below the expected return, the greater the risk Return • Investment returns measure the financial results of an investment • Returns may be historical or prospective (anticipated/expected) • Can be expressed in units of currency (dollars or RM) or percentage terms Risk, Return and Financial Markets • We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets • Lessons from capital market history – There is a reward for bearing risk – The greater the potential reward, the greater the risk – This is called the risk-return trade-off The Importance of Financial Markets • Financial markets...
Words: 1187 - Pages: 5
...University of Phoenix Material Definitions Define the following terms using your text or other resources. Cite all resources consistent with APA guidelines. |Term | | | |Time value of money |Definition |Money received in the present is more valuable than the same money in the | | | |future, given there is interest earned during that period. | | |Resource you used |Time Value of Money. (2015). In Investopedia. Retrieved from | | | |http://www.investopedia.com/terms/t/timevalueofmoney.asp | |Efficient market |Definition |Existing share prices in the stock market always reflect and incorporate | | | |relevant information because of stock market efficiency, thus it is | | | |impossible to “beat the market.” | | |Resource you used |Efficient Market Hypothesis-EMH. (2015). In Investopedia. Retrieved from | | ...
Words: 699 - Pages: 3
...From investopedia.com Modigliani and Miller's Tradeoff Theory of Leverage The tradeoff theory assumes that there are benefits to leverage within a capital structure up until the optimal capital structure is reached. The theory recognizes the tax benefit from interest payments - that is, because interest paid on debt is tax deductible, issuing bonds effectively reduces a company's tax liability. Paying dividends on equity, however, does not. Thought of another way, the actual rate of interest companies pay on the bonds they issue is less than the nominal rate of interest because of the tax savings. Studies suggest, however, that most companies have less leverage than this theory would suggest is optimal. (Learn more about corporate tax liability in How Big Corporations Avoid Big Tax Bills and Highest Corporate Tax Bills By Sector.) In comparing the two theories, the main difference between them is the potential benefit from debt in a capital structure, which comes from the tax benefit of the interest payments. Since the MM capital-structure irrelevance theory assumes no taxes, this benefit is not recognized, unlike the tradeoff theory of leverage, where taxes, and thus the tax benefit of interest payments, are recognized. In summary, the MM I theory without corporate taxes says that a firm's relative proportions of debt and equity don't matter; MM I with corporate taxes says that the firm with the greater proportion of debt is more valuable because of the interest tax...
Words: 352 - Pages: 2
...transportation. .The ability to move bulk .Little risk of disruption due to weather -Low variable costs. It is a safe and reliable mode of transport system. · It is an economical and dependable mode of transport system particularly to the sensitive and strategic areas. · It provides a long term infrastructural option. · The difficulties in handling large volume of products by rail from one loading point is reduced. · Minimum transit loss. initial cost of laying pipelines is high and very expensive. Disadvantages . High initial cost . Long transit time(about ten miles)per hour per liquid .Leakage in pipes might pollute soil and contaminate ground water. Initial cost of laying pipelines is high and very expensive. If pipelines are damaged, it can cause soil pollutionand damage to environment. Some solids,liquids & gases when transported cause damage to the pipeline.they may corrode material used for making pipeline. 2.What is tradeoff and examples of tradeoff. A trade-off (or tradeoff) is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. It often implies a decision to be made with full comprehension of both the upside and downside of a particular choice; the term is also used in an evolutionary context, in which case the selection process acts as the "decision-maker". Examples of tradeoff is as follows Trade-off between wage inflation and...
Words: 484 - Pages: 2
...Risk and Return Tradeoff Memo Analyzing the risk and return tradeoffs associated with Casa Bonita’s portfolio Diversity is an important part of any portfolio; diversity in the industries chosen for investment and in the level of risk undertaken are the two most important factors when considering how to construct a corporate investment portfolio.(3) Casa Bonita is a growing company and it is important that we invest our capital wisely if we are planning to use the gains to fund expansion and corporate growth. As corporate officers we have a duty to our employees, our customers, and the corporate community to be measured and knowledgeable about every investment decision we make. Investment decisions should almost be methodical, however due to the nature of the stock market it is hard to be methodical as there is a certain level of predictability that must be present for us to become methodical in our investment decision making. Decisions made during the simulation As the Treasury Analyst for Casa Bonita during the simulation it was my job to build the corporate investment portfolio in a manner that would produce the largest amount of returns while taking the minimum amount of risk. Initially the market conditions were great with multiple stocks expected to perform above average, however it was still important to include stocks that would perform well even in an economic downturn in our portfolio. The inclusion of “recession proof” securities provides stability, or a foundation...
Words: 742 - Pages: 3
