Introduction To Portfolio Theory Finance Essay - Free Essay Example

Sample details Pages: 5 Words: 1606 Downloads: 5 Date added: 2017/06/26 Category Finance Essay Type Cause and effect essay Did you like this example? Firstly, we need to define the word of portfolio in order to get more understanding about the portfolio theory and portfolio development. Portfolio is refers to a group of financial assets such as stocks, bonds and cash. The portfolios are mostly hold by investors according to their risk tolerance, time taken and investment objectives and/or will be controlled by financial professionals, banks and other financial institutions to get the better allocation of risk-return portfolio. Don’t waste time! Our writers will create an original "Introduction To Portfolio Theory Finance Essay" essay for you Create order Besides, there are two types of risk that involved: diversified and undiversified risk. Diversified risk also called as unsystematic risk which the risks cannot be fully predicted and avoided, the examples are interest rates and wars. The undiversified risk is known as systematic risk and this kind of risk can be reduced through suitable diversification and it is more specific to individual stock. The History of Portfolio Management Portfolio Theory is also known as Modern Portfolio Theory (MPT). It was first developed and discovered by Harry Max Markowitz. He is an American economist, born on 24th August 1927. He is also a professor of finance at the Rady School of Management at the University of California, San Diego. Portfolio Theory was introduced in his paper Portfolio Selection which was published in the Journal of Finance in 1952. In 1990, he won the Nobel Prize in Economic Sciences for the Theory, shared with Merton Miller and William Sharpe. Markowitz is not only known for his pioneering work in Portfolio Theory. He is also very known for the study of the effects of asset risk, return, correlation and diversification related to investment portfolio returns. The Benefits of Portfolio Management The main advantage of portfolio management is to help companies manage all their processes as well as set objectives. Small businesses may not have a structure for portfolio management, but most companies often employ someone to handle their projects. A portfolio management benefits the investors in making decisions especially risk matters. It is very important for investors to know how to control risk in their business portfolios. Besides that, it improves business performances. Portfolio management improves business performances by setting the priorities for better project delivery. Business projects are often achieved by resources which are evenly shared alongside with other projects. Many projects may end up competing for resources. This is where portfolio management is much needed. It helps in planning so that resources are equally distributed in all the business processes. This involves measuring, comparing, and prioritizing the most valuable projects only. The conflicts between the projects for resources are resolved by the high level management. The skill sets required for each project and ideal source of these resources are determined by incorporating formal sourcing strategies. The performance problems are corrected earlier to their development in major issues. Although, portfolio management cannot completely eliminate performance failures, it helps in identifying the performance issues early. The portfolio management involves steps such as identify, growth and deal with any issues related to implementation. The portfolio also helps in keeping the progress of projects or work on track. Traditional and Modern Portfolio From the evolution of mankind, people are trying to get rich. Hence, many investments have been made. Countless method has been introduced to manage portfolio. In this page, we will compare Markowitz Modern Portfolio Theory and Altman Z-score theory. Modern Portfolio Theory Also called modern investment theory, this theory states that investors will only bear excessive rate if they are compensated sufficiently. This theory is developed by Harry Markowitz in year 1950th. Modern Portfolio Theory seeks to construct an optimal portfolio by looking at the relationship between risk and return by measuring alpha, beta and R-squared. Investors can construct an optimal portfolio by maximizing the expected return for that level of risk. The formula for Markowitzs theory is as below. E(R_i) = R_f + beta_{i}(E(R_m) R_f), Where E(R_i)~~is the expected return on the capital asset R_f~is the risk-free rate of interest such as interest arising from government bonds beta_{i}~~(the  beta) is the  sensitivity  of the expected excess asset returns to the expected excess market returns, or also  beta_{i} = frac {mathrm{Cov}(R_i,R_m)}{mathrm{Var}(R_m)}, E(R_m)~is the expected return of the market E(R_m)-R_f~is sometimes known as the  market premium  (the difference between the expected market rate of return and the risk-free rate of return). E(R_i)-R_f~is also known as the  risk premium According to Markowitz, there is a formulation, efficient market frontier that used to measures and calculates the portfolio in the level of ideal return and risk. Graph below shows the efficient frontier for two stocks (Google and Coca Cola) in year 2006 where the Google has high risk -return and Coca Cola has low risk-return. https://i.investopedia.com/inv/articles/site/CT_MPT_2r.gif The Efficient Frontier along with the portfolios would expect a higher on returns than its typical on the average for the level of risk the portfolio assumes. We would notice the Efficient Frontier line will starts lower at first and then slowly the expected risks and return will move higher. Investors having different investing profiles can find a suitable portfolio at any place within The Efficient Frontier. As the Efficient Frontier flattens, it goes higher due to the peak limit the investors can already expect. By using the Monte Carlo simulation, we can use the percentage of standard deviation and average return, types of chosen investment and time horizon to compute and comparing the annualized return rate of different investments. The formula is ÃÆ' ¢Ãƒâ€¹Ã¢â‚¬  Ãƒâ€¦Ã‚ ¡(ÃÆ'Ã… ½Ãƒâ€šÃ‚ £Wa2ÃÆ' Ãƒâ€ Ã¢â‚¬â„¢a2 + ÃÆ'Ã… ½Ãƒâ€šÃ‚ £ÃƒÆ'Ã… ½Ãƒâ€šÃ‚ £WaWbCovab), where w is the size of portfolio in a security, ÃÆ' Ãƒâ€ Ã¢â‚¬â„¢ is the standard deviation of the expected return in the security and Cov is the covariance of the expected return in the security. According to the graph below, when the number of portfolio is increasing, the percentage of average portfolio standard deviation and risk to a one-stock portfolio will also decreasing at the same time. In Modern Portfolio Theory, the Sharpe Ratio is use to find the best proportion of the possible securities used and also a measurement for return to risk. The formula for Sharpe Ratio is: S(x) = ( rx   -   Rf ) / StdDev(x) where x is some investment rx is the average annual rate of return of x Rf is the best available rate of return of a risk-free security (i.e. cash) StdDev(x) is the standard deviation of rx The Sharpe Ratio of X is the slope of the line joining cash with X There is another calculation method to calculate the expected return for two assets portfolio, which is ERP = ÃÆ' ¢Ãƒâ€¹Ã¢â‚¬  Ãƒ ¢Ã¢â€š ¬Ã‹Å"wiERi Portfolio Strategies According to Mr. Markowitz, there are two types of portfolio strategies which are passive portfolio strategies and active portfolio strategies. The passive portfolio strategy is a strategy that will relies more on the minimum of input in order to have better performances in some of the market index. The other one, active portfolio strategy is a strategy that uses all the market information or available information and evaluating techniques to get a better portfolio performance. In addition, there are 3 types of portfolio, which are patient, aggressive and conservative portfolio. The patient portfolio is mostly the famous taken stock and has the most holders and buyers for longer time period. Those also reflect of the high growth companies and having the higher profit of income. The aggressive portfolio is those having higher return, higher risk and also has the most potential of future development stock. However, the aggressive portfolio would experience unexpected turnovers over time. The conservative portfolios have a stable and trustable earnings growth and history of dividend. Argument of Modern Portfolio Theory When Markowitz and Sharpe first created this theory, they define risk and volatility. This theory concept is the greater the volatility, the higher the beta, the greater the risk. Yet, there are no proof that measuring volatility as risk is a good measurement. In (J. Michael Murphy, Efficient Markets, Index Funds, Illusion, and Reality,  Journal of Portfolio Management  (Fall 1977), pp. 5-20.), it states that I realized returns appear to be higher than expected low low-risk securities and lower than expected for high-risk securities or that the [risk-reward] relationship was far weaker than expected. He also stated that Other important studies have concluded that there is not necessarily any  stable  relationship between risk and return; that there often may be virtually no relationship between return achieved and risk taken; and that high volatility unit trusts were not compensated by greater returns. In Haugen and Heins, Risk and the Rate of Return on F inancial Assets: Some Old Wine in New Bottles,  Journal of Financial and Quantitative Analysis  (December 1975), pp 775-84) concluded that The results of our empirical effort do not support the conventional hypothesis that risk systematic or otherwise generates a special reward. These papers were published in the mid to late 70s, just as EMH and MPT were really taking off and revolutionizing the way Wall Street invested money. In year 2008 economy meltdown, lots of stocks were losing money. Yet, only a few assets classes performed well, namely gold, oil, gasses and Treasury bond. These assets classes have very low risk or volatility. Moreover, calculating beta is practically very difficult. https://www.smart401k.com/Content/Education/Smart401k/Home/advanced-retirement-investing/Modern-Portfolio-Theory.aspx https://www.efficientfrontier.com/ef/996/basics.htm https://www.investopedia.com/walkthrough/corporate-finance/4/return-risk/portfolios.aspx

Essay on The Great Classics of the Classical Period

Following the Baroque period, the Classical period is one of the greatest musical eras in history. The style flowed directly off of its Baroque predecessors, smooth, but differing in the tempo. Many of the greatest composers emanated from the Classical era, Haydn, Mozart, and Beethoven among them. This time period transformed the course of not just musical history, but that of the entire modern western world. Johann Sebastian Bach was the Alpha and the Omega of the Baroque period. Classical music, as we refer to it today, is usually thought of as any music that mainly consists of orchestral instruments, but as a matter of fact, it actually was its own period in music history. The classical period arrived out of reaction to the excesses†¦show more content†¦At the age of 26, Wolfgang relocated to Vienna to study under â€Å"Papa† Haydn. Sadly though, Mozart’s work was never appreciated during his lifetime, because of his new style of mixing tempos and rhythms. Mozart died young and broke at the age of 35, with really only one friend, his tutor, Haydn. Born 14 years after Mozart, Ludwig Van Beethoven is one of the most recognizable composers in history. He alone influenced classical music more than anyone else in history. His 5th symphony is one of the most listened to, and identifiable by any class of people, in the world. Like Mozart, Beethoven moved to Vienna in his 20’s to further his musical talent. Also, following in Mozart’s footsteps, he studied under none other than â€Å"Papa† Haydn, himself. The expressiveness of Beethoven’s music typified his extreme temper. This temper just magnified when, at the age of 31, Beethoven realized he was losing his hearing. This event led Beethoven to single-handedly bring music out of the Classical period and into the articulateness, Romantic era. The Classical period was monumental in securing the popularity of â€Å"classical† music in today’s world. 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Service Marketing & Relationship Marketing-Samples for Students

Question: Discuss about the Service Marketing and Relationship Marketing. Answer: Starbucks Front Stage Service Process Systems Significance of the Front Stage Service Encounter The primary role of the front stage service encounter is to be able to provide the consumer with a satisfying experience when they approach the company. Most organizations will opt for using front-stage employees who are stationed on site to deal with the consumer needs or sometimes, the organization may rely solely on technological appliances to serve the consumer (Teboul, 2006). As portrayed, Starbucks depends on both technology and employees at the front stage to be able to serve the consumer. In fact, most of the activity is done by the front stage employees who form most of the consumer relations at the front stage level. Accordingly, Starbucks outlets usually have employees who wear uniforms that represent the company and are responsible for setting up the premises in a manner that confirms to the consumer that they are receiving services from Starbucks Company (Carrie, 2012). The main significance of the front stage employees is that they are primarily responsible for the cons umer experience of the service and have a role in determining the reputation of the company outlets. For Starbucks, the outlets are meant to serve coffee products giving the consumer the full barista experience. Therefore, the main idea behind Starbucks front stage service is to ensure that the employees are able to relive the vision of their directors in providing the barista service while also ensuring that they work according to the consumer preferences. The implications are not as complex but the front stage employees also have to work with the demands of the consumer to ensure that they maintain a positive consumer relationship which may not auger with their employer requirements (Glushko R.J., and Tabas L., 2008).Nevertheless, the front stage processes are rather focused on the consumer experience such that the director requirements are mostly in line with what the experience the consumer expects to get. As in a normal barista, the Starbucks Front Stage experience is based on the manual services as opposed to more optimized services supported by technology. The approach is rather traditional of the barista outlets by other companies. (Zomerdijk, L.G. and Voss, C.A., 2010) explains that there are benefits to the use of technology in the sense that it results in convenience on both the consumer and the company. However, consumer still tend to prefer front stage services that rely more on front stage employees other than technological appliances, probably due to the fear of technical failures. The idea may form the basis of having a cashier and a barista to serve the coffee. Furthermore, (Stern, 2017) reports that Starbucks did not have a successful start in Australia due to the saturated market and the increased preference for barista coffee over instant coffee. The company therefore opts to provide the Australian consumer with a barista experience to ensure that they are able to retai n their new consumers. The use of front stage employees is therefore a flexible manner in which the company is able to change its consumer experience to differentiate itself from other barista outlets. Furthermore, the front stage system process allows the consumer to make real life connections to the company through a favorite barista or a friendly and satisfactory service which is more lasting than a simple money-service transaction. Starbucks Backstage Service System Process Significance of Back Stage Service Process The back store service processes have to complement the desired front stage service encounter. Starbucks barista coffee is aimed at providing the consumer with the quality product but at minimal financial loss which makes the back stage process an important aspect of the service delivery. The main significance of the back stage process is that it is the main driving machine of the service design. The activities in the back stage are what make possible the service that the consumer experiences at the front stage. Therefore there is always a need for a level of coordination and sometimes integration between the back stage and the front stage to deliver the best service experience to the consumer (Glushko, R.J. and Tabas, L. , 2009). Service design is important for Starbucks primarily because the barista coffee industry is rather competitive in Australia and most of the outlets provide their coffees at price ranges that are uniform across the companies. The service design is also, there fore, dependent largely on the back stage processes such that it forms part of the tangible and intangible brand experiences that keep the users loyal to the company. For Starbucks, the backstage processes involve keeping the premises welcoming for the consumer and ensuring that all the required resources are available to deliver service to the consumer on request. Some of the back stage processes include equipment maintenance, arrangement of working spaces, organizing for coordination of the payment and service process as well as face aspect of the outlets involving use of branded uniforms and menus. The perception of service encounters as information exchange may lead to the assumption that intense encounters may lead to a better service. However, the back stage process at Starbucks is focused on efficiency. The consumers are allowed to make their payments first as a means of alleviating the employee and space costs for waiters. The service is therefore delivered by a minimum number of employees who receive payments and prepare orders. (Zomerdijk, L.G. and Voss, C.A., 2010) suggests that intense interaction with the consumer is not only tedious but bears the risk of failing to satisfy consumer desires, contrary to expectations of most company owners. In this back stage process, Starbucks is focused on putting products and ingredients as well as equipment in place and working towards efficiently getting the consumers services as quickly as possible. After the consumer has made a decision on their order, the barista (but mostly, the cashier) quickly invoices their payment and make s receipts which the consumer uses to receive their orders. (Carrie, 2012) suggests that barista outlet owners should have an idea the most demanded types of coffee beforehand to be able to deliver quicker service. The back stage process therefore influences the front stage orderliness and timeliness in provision of services. As the consumer receives payment and waits to be called for the order the barista works on making the coffee such that the consumer gets the barista experience in terms of suggesting their own ingredient and art preferences. Bibliography Glushko, R.J. and Tabas, L. . (2009). Information Systems and E-Business Management, 407-427. Carrie, D. (2012). What a Starbucks Barista Can Teach You About Good Customer Service Skills. Carrie Dils, n.d. Glushko R.J., and Tabas L. (2008). Bridging the "front stage" and "back stage" in service system design. Hawaii International Conference on System Sciences, Proceedings of the 41st Annual, 106. Glushko, R.J and Tabas, L. . (n.d.). Bridging the "front stage. Stern, M. (2017). Is Starbucks pasing the buck to barista on consumer service. Retail Wire, n.d. Teboul, J. (2006). Service is front stage: positioning serices for value advantage. n.d, n.d. Zomerdijk, L.G. and Voss, C.A. (2010). Service design for experience-centric services. Journal of Service Research, 67-82