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Numerology for Pets

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Diversification of Portfolio

Diversification

Before discussing diversification, we should first understand the correlation between the different investment opportunities.
Correlation is the statistical measure of the relationship between any two series of numbers. The two series moving parallel in same direction will be positively correlated. And if two series are moving in opposite directions they will be negatively correlated.

We know that the returns of a portfolio can be maximized by diversifying the risk. And diversification totally depends upon the correlation of assets. In diversifying the portfolio for the purpose of reducing risk, correlation is best measure of risk attached with the proposed portfolio. Before making the portfolio, one must understand that the securities selected should be negatively correlated. Because the negative correlation means high diversification of portfolio and high diversification means more certainty of positive return from the portfolio.

Some assets are uncorrelated means there is no correlation between their returns. Combining uncorrelated assets can reduce risk but not so effectively than combining pure negatively correlated assets.
Correlation, Diversification, Risk and Return
In general, the lower the correlation between assets return, the greater the potential diversification of risk. How much the risk of portfolio can be minimized depends upon the degree of correlation between the assets returns.
There are three types of combinations:
Positively correlated    In which degree of correlation is greater than zero means low diversification so, risk will greater and return will uncertain.
Uncorrelated    In which degree of correlation is approximately equals to zero means total diversification so risk will smaller and return will certain.
Negatively Correlated    In which degree of correlation is less than zero means pure diversification so risk will eliminated and returns will higher.

Diversification of Portfolio

Diversification

Before discussing diversification, we should first understand the correlation between the different investment opportunities.
Correlation is the statistical measure of the relationship between any two series of numbers. The two series moving parallel in same direction will be positively correlated. And if two series are moving in opposite directions they will be negatively correlated.

We know that the returns of a portfolio can be maximized by diversifying the risk. And diversification totally depends upon the correlation of assets. In diversifying the portfolio for the purpose of reducing risk, correlation is best measure of risk attached with the proposed portfolio. Before making the portfolio, one must understand that the securities selected should be negatively correlated. Because the negative correlation means high diversification of portfolio and high diversification means more certainty of positive return from the portfolio.

Some assets are uncorrelated means there is no correlation between their returns. Combining uncorrelated assets can reduce risk but not so effectively than combining pure negatively correlated assets.
Correlation, Diversification, Risk and Return
In general, the lower the correlation between assets return, the greater the potential diversification of risk. How much the risk of portfolio can be minimized depends upon the degree of correlation between the assets returns.
There are three types of combinations:
Positively correlated    In which degree of correlation is greater than zero means low diversification so, risk will greater and return will uncertain.
Uncorrelated    In which degree of correlation is approximately equals to zero means total diversification so risk will smaller and return will certain.
Negatively Correlated    In which degree of correlation is less than zero means pure diversification so risk will eliminated and returns will higher.

The Active Strategy

Portfolio Management Strategy
3. The Active Strategy
Most of the techniques discussed in this text involve an active approach to investing. In the area of common stocks, the use of valuation models to value and select stocks indicates that investors are analyzing and valuing stocks in an attempt to improve their performance relative to some benchmark such as a market index. They assume or expect the benefits to be greater than the costs.

Pursuit of an active strategy assumes that investors possess some advantage relative to other market participants. Such advantages could include superior analytical or judgment skills, superior information, or the ability or willingness to do what other investors, particularly institutions, are unable to do. For example, many large institutional investors cannot lake positions in very small companies, leaving this field for individual Furthermore, individuals' are not required to own diversified portfolios and are not prohibited from short sales or margin trading as are some institutions.

Most investors still favor an active approach to common stock selection and management despite the accumulating evidence from efficient market studies and the published performance results of institutional investors. The reason for this is obvious that the potential rewards are very large, and many investors feel confident that they can achieve such awards even if other investors cannot.

Buy Hold Strategy

Portfolio Management Strategy

2. Buy-And-Hold Strategy
A buy-and-hold strategy means exactly that an investor buys stocks and basically holds them until some future time in order to meet some objective. The emphasis is on avoiding transaction costs, additional search costs, and so forth. The investor believes that such a strategy will, over some period; of time, produce results as good as alternatives that require active management whereby some securities are deemed not satisfactory; sold, and replaced with other securities. These alternatives incur transaction costs and involve inevitable mistakes.

Notice that a buy-and-hold strategy is applicable to the investor's portfolio whatever its composition. It may be large or small, and it may emphasize various types of stocks.

The Passive Strategy

Portfolio Management Strategy

1. The Passive Strategy
A natural outcome of a belief in efficient markets is to employ some type of passive strategy in owning and managing common stocks. If the market is highly efficient, impounding information into prices quickly and on balance accurately, no active strategy should be able to outperform the market on a risk-adjusted basis. The efficient market hypothesis (EMH) has implications for fundamental analysis and technical analysis, both of which are active strategies for selecting common stocks.

Passive strategies do not seek to outperform the market but simply to do as well as the market. The emphasis is on minimizing transaction costs and time spent in managing the portfolio, because any expected benefits from active trading or analysis are likely to be less than the costs. Passive investors act as if the market is efficient and accept the consensus estimates of return and risk, recognizing current market price as the best estimate of a security's value.

An investor can simply follow a buy-and-hold strategy for whatever portfolio of stocks is owned. Alternatively, a very effective way to employ a passive strategy with common stocks-is to invest in an indexed portfolio. We will consider each of these strategies in turn.

Open & Closed End Investment Companies

Closed-End Investment Companies

One of the two types of managed investment companies, the closed-end investment company, usually sells no additional shares of its own stock after the initial public offering. Therefore, their capitalizations are fixed, unless a new public offering is made. The shares of a closed-end fund trade in the secondary markets (e.g., on the-exchanges) xactly like any other stock.
To buy and sell, investors use their brokers, paying (receiving) the current price at which the shares are selling plus (less) broker age commissions.
Open-End Investment Companies (Mutual Funds)

Open-end investment companies, the most familiar type of managed company are popularly referred to as mutual funds and continue to sell shares to investors after the initial sale of shares that starts the fund. The capitalization of an .open-end investment company is continually changing—that is, it is open-ended—as new investors buy additional shares and some existing shareholders cash in .by selling their shares back to the company.

Mutual funds typically are purchased either:

1. Directly from a fund company, using mail or telephone, or at the company's office locations.
2. Indirectly from a sales agent, including securities firms, banks, life insurance companies, and financial planners.

Mutual funds may be affiliated with an underwriter, -which usually has an exclusive right to distribute shares to investors: Most underwriters distribute shares through broker/dealer firms.

Investment Companies

Investment Companies

All investment companies begin by selling shares in themselves to the public. The proceeds are then used to buy a portfolio of securities. Most investment companies are managed companies, offering professional management of the portfolio as one of the benefits. One less well-known type of Investment Company is unmanaged. We begin here with the unmanaged type and then discuss the two types of managed investment companies. After we consider each of the three types, we focus on mutual funds, the most popular type of investment company by far for the typical' individual investor.

Unit Investment Trusts

An alternative form of. Investment Company that deviates from the normal managed type is the unit -investment trust, (OIT), which typically is an unmanaged, fixed-income security portfolio put together by a sponsor and handled by an independent trustee. Redeemable trust certificates representing claims against the assets, of the trust are sold to investors at net asset value plus a small commission. All interest (or dividends) and principal repayments are distributed to the holders of the certificates. Most unit investment trusts hold either equities or tax-exempt securities.

The assets are almost always kept unchanged, and the trust ceases to exist when the bonds mature, although it is possible to redeem units of the trust.

In general, unit investment trusts are designed to be bought and held, with capital preservation as a major objective. They enable 'investors to gain diversification, provide professional, management that takes care of all the details, permit the purchase of securities by (he trust at a cheaper; price than, if purchased individually, and ensure minimum operating costs.. If conditions change, however, investors lose the ability to make rapid, inexpensive, or costless changes in their positions.

Other Stock Indexes

Other Stock Indexes

The New York Stock Exchange publishes its own indexes based on the industrial firms, transportation firms, and utilities, among others, traded at the exchange. The most widely quoted is the NYSE Composite an average of all NYSE listed stocks. The American Stock Exchange prepares a similar index on its securities as does the NASDAQ market. Value Line publishes an index based on the securities covered in the Value Line Investment Survey.

Fixed Income Indexes:

More than 400 indexes measure fixed income securities. Despite what the typical investor might think, bonds vary widely in their riskiness and investment characteristics. When comparing performance, investors need to distinguish between corporate bonds, tax-exempt bond, foreign bonds, short and long term bonds, investment grade and junk bonds, and so on. The wide range of available indexes increases the likelihood that investors can identify a benchmark with characteristics they want. The Dow Jones 20 Bond Index is part of the Dow Jones &Company stable of market indexes. Standard &Poor's has more than a dozen indexes of bond, market. Two especially important ones are the S&P Municipal Bond Index and the S&P U.S. government Bond Index.
International Indexes:

The popularity of international investing has triggered an increasing number of useful global indexes. Some of these owe their creation to the popularity of trading in derivative instruments such as futures and options contracts.

1. European Indexes:

In the United Kingdom, the most important index is probably the FT-SE, 100, known as the "Footsie 100". This Financial Times stock exchange is based on the 100 U.K. stocks with the largest capitalization. In Germany, the principal index is the DAX30, specifically introduced for the trading of futures contracts. This total return index includes the reinvestment of dividends on the individual components.
2. Asia and the Pacific Rim:

Japan is the principal market in Asia, although Hong Kong and Singapore are rapidly rising in importance. Japan has the Nikkei 225, a price weighted index that has been around since 1949. This is index contains 225 large, activity traded Japanese stocks on the Tokyo Stock Exchange. Another Japanese index, TOPIX, includes about 1,200 large companies. A recent addition for futures market purposes is the Nikkei 300, a capitalization weighted index like the S&P500.

Stock Market Indexes

Indexes

Indexes are useful in assessing investment results. They provide a benchmark against which performance can be compared. They also useful in financial research, through which an investigator seeks to discover the relationship between certain economic variables and market results. In fact, most of us keep abreast of developments in “the market” by watching the indexes.
Most popular indexes

Stock Indexes:

Probably no one knows precisely how many different stock indexes exist at any given time even considering just those indexes in the United States. Globally, the chore of maintaining an accurate accounting of each index is probably impossible. Now measures are continually being added and some are deleted as more effective ones come about.

1. Dow Jones Averages:

To the general public, the Dow Jones averages are probably the most familiar stock market indictors. The four primary averages are the industrial average the transportation average, the utilities average, and the Dow Jones composite.
Dow Jones & Company introduced the Dow Jones Industrial Average in 1896. Initially the index was based on the value of 12 companies. The first value of the average was 40.94 on May 26, 1896.

2. Standard & Poor’s Indexes:

Not surprisingly, the Standard & Poor’s Corporation also prepares and publishes a large number of indexes. The calculation method for all S&P indexes is identical. The S&P 500 Composite is probably the most widely used. This value-weighted index contains 500 NYSE-traded securities. Standard & Poor’s describes it as “an index of leading companies in leading industries.” It is not, however, the 500 largest U.S stocks, although many people erroneously believe so.

It is important to recognize that just because there are 500 stocks in the S&P 500 index this does not mean that the index cannot be swayed by individual stock performance.

Degrees of Informational Efficiency

Degrees of Informational Efficiency
1. Weak form Efficiency:

The least restrictive form of the EMH (Efficient Market Hypothesis) is weak form efficiency, which states that future stock prices cannot be predicted by analyzing price from the past.

2. Semi-strong Form:

The weak form of the EMH states that security prices fully reflect any information contained in the past series of stock prices. Semi-strong form efficiency takes the information set s step further and includes all publicly available information. The semi-strong form of the EMH states that security prices fully reflect all relevant publicly available information.
3. Strong Form Efficiency:

The most extreme version of the EMH is strong form efficiency. This version states that security prices fully reflect all public and private information. In other words, even corporate insiders cannot make abnormal profits by exploiting their private; inside information about their company.
Inside information is formally called material, nonpublic information

Efficiency of Markets

Efficiency of MarketLike technical analysis, market efficiency is a controversial part of finance. In an efficient market security prices are based on the available information so as to offer and expected return consistent with their level of risk.Types of Efficiency
The two types of efficiency are operational efficiency and informational efficiency. Operational efficiency is a measure of how well things function in terms of speed of execution and accuracy. At a stock exchange, operational efficiency is measured by such factors as the number of orders lost or filled incorrectly and the elapsed time between the receipt of an order and its execution.

Informational efficiency is a measure of how quickly and accurately the market reacts to new information. New data constantly enter the marketplace via economic reports, company announcements, political statements, or public opinion surveys, to name a few sources.

What is Finance

What is FinanceFinance is the art and science of managing money.
Art in the sense that because we have to get the money from the individual and organization. Means we have to use others money for our benefit. So, convincing others to give us money is an art because it require the perceptions and thinking from other point of view.
Science in the sense that we use different internationally accepted principals for the proper utilization of funds. And we use different theories and principals in finance.
Areas and Opportunities
Areas of finance are in which we can chose our career opportunities. In this we have Financial Services and Managerial Finance.
Financial services is the area in which we provide consultancy services and sell the advice and idea. Many organization are doing this job in which audit firms and credit rating companies are the best examples.
Managerial Finance relates to the functions of an operational manager in which he/she is performing his duties. His duties include the managing the financial resources of the organization, planning about the execution of different projects, selecting the alternatives, etc.