forum week 5

Investors are concerned with holding an optimal portfolio. Consider the choices an investor can make. How will the portfolio choices differ for a conservative investor? What about an aggressive investor? Which type of investor would you most likely identify with?

References

• Optimal portfolio is the portfolio that delivers maximum return with minimum to average risk. Investors are interested in determining an optimum portfolio which allows for maximum return to them under minimum to average risks. Optimal portfolio consists of stock or bonds, risk-free investments, or a combination of various investments. The risk is usually not high and conservative investors tends to focus on moderate risk investments. High risk investments carry a high level of penalties, insurance and possible loss is high so conservative investors focus on investments with low risk to average risk and the consequences of that is that those investments tend to have a return lower than high risk investments (Peterson & Fabozzi, 2012). Low risk to average risk investment are government bonds, municipal bonds, long term investments.
• Aggressive investors focus on high risk and corresponding to high returns. High returns usually come with high premium for insurance for their obvious risk level. The possibility of losses is high, and it is done either by people who really understand the market, are chasing big returns in a hurry or people who do not understand and are following the cloud.
• Investing invokes the idea of valuation. Valuation is an important step and the reason most people invest in otherwise questionable manner is that they use valuation to validate their purchase, bias in valuation and faulty models used (Inc, McKinsey & Company, Koller, & Goedhart, 2015). Before investing most companies and private investors do request valuation on a stock or company, by paying of course, to know the value of what they are purchasing. Professor Aswath Damodaran indicates that some investors do research on companies they want to invest in and the more they know the more their judgement and common sense get clouded, so they purchase following how they feel not what the value is. He also indicates that if the stock or company value can be analyzed using 10 sets of data do not go looking for an 11th and some analysts and investors get lost in numbers and feel validated by what the results of their models tell them in an otherwise simple or extremely complicated story.
• To me the best investment strategy is to understand the market, understand the context of business operation, respect valuation results and use common sense. I would be an investor who does not follow the cloud and hope to dodge the down turn at the very end. Conservative investment is good option but a mixture of the two would be an option up to a certain point where conservative investment is the ultimate majority and aggressive investment low but vibrant to keep cash flow (Klein & Iammartino, 2010, p. xx). Amazon for example is a company requires long term investment just because their investment and operating cost are high but they are not stopping their online market dominance. BlackRock Capital Investment Corporation (BKCC) is at 10.6% a high yield investment whereas Amazon is at 0, yes 0.

Inc, McKinsey & Company, Koller, T., & Goedhart, M. (2015). Valuation: Measuring and Managing the Value of Companies, University Edition. Hoboken, NJ: Wiley.

Klein, P. J., & Iammartino, B. R. (2010). Getting started in security analysis. Hoboken, NJ: Wiley.

Peterson, D. P., & Fabozzi, F. J. (2012). Analysis of financial statements. Hoboken, NJ: Wiley.