Financial Investment Analysis Essay Example | Topics and Well Written Essays - 1250 words

Financial Investment Analysis - Essay ExampleThis, particularly, mustiness be challenging for companies with global operations that may have their cash balances fragmented across antithetical geographies, banks, and bank accounts which make accessing cash difficult (Huang 2003). In this regard, this paper seeks to address the issue of efficient variegation as a comprehensive strategy in liquidity and stock return. Liquidity of an asset explains the remedy with which an asset shtup be sold after its purchase without incurring further losses and how risks can be mitigated if not minimized (Baker 2006). The various losses that could be incurred may be due(p) to the various transaction costs or price changes or poor investment strategies. Thus the principal(prenominal) aim of this study shall be to examine how proportionate efficient diversification increases the neutralization of low determine and promising high returns (Elton et al. 2007). The paper holds that efficient diversi fication must there is a potential advantage when risky part of portfolio consists of weight proportions of all possible risky assets. Naive and Efficient Diversification Studies make on investment on stock markets and equity securities have documented the relationship that exists in weighted portfolios (proportionate or otherwise on risky assets). Broadly speaking, there two causes of uncertainty. Elton et al (2007) note that one and only(a) of them is risk which relates to broad economic conditions. These include inflation, currency exchange rates, interest rates and business cycle. Interestingly, these macro-economic aggregates cannot be foreseen with implicit surety, yet they move on the rate of returns. Second, according to them, is a firm- peculiar(prenominal) influence which affects the organization without seemingly affecting other companies (Elton et al. 2007). These include effects such as managerial structure, human resource changes and look and development (Baker 2006). Obviously when diversification is naively done, for instance adding additional security to a risky portfolio, hence this should work to lessen portfolio risk. The implication here is that continued diversification into even other securities more than and more decreases the probability of exposition to the specific risk factors of the company, thereby ensuring the falling of portfolio volatility (Jagannathan and Wang 2006). All this happens when it is naive diversification where equally weighted portfolio of many securities is employed (Elton et al 2007). Inherently, if risks are only firms specific means, diversification still reduces the risk to reasonable low levels (Baker 2006).This means that when it comes to a situation where the sources of risks are self-governing and there is spreading of investment into numerous securities, there is negligibility of exposure to specific font of risk. This is what is sometimes referred to the insurance principle (Jagannathan and Wa ng 2006). Regardless of this however, the tragedy is that in a situation where common risk foundations have impact on all companies, even widespread diversifying fails to eradicate risk. At this, portfolio standard deviation reduces when securities numbers increases. disrespect this, it is never reduced to zero, and thus there must be a market risk/ opinionated risk, which is attributed to market forces (Jagannathan and Wang 1996). Else how, efficient diversification is often done when weighted portfolios are employed proportionately.