The Validity of Diversification in Investment Management
Discuss About The Globalization Equity Returns African Markets.
Luck is a notion that many people think it can work on their favor when it comes to financial markets. To some degree luck may against an investor or favor them. However, expecting luck without calculated risk does not make any sense to any rational investors. More often luck will be tied to speculation done by the investor and if it behave in their favor that is luck. To be precise luck and risk is one and the same thing. The difference is that, one can be quantified and calculated while the other applies the rule of thumb (Arthur, 2018). For the people who understands finance. They know that there is no existence of anything as luck. In fact they believe that calculated risk, speculation and the forces of demand and supply in the financial markets may affect how their securities or investments behavior. That explains the reason why most investors understand the market behaviors and they are well updated with the changes in the market world (Barberis, 2015). Ignorance and complacency are two things that have not worked for prudent investor. More often people lose money not because they it was not their day but because they were ignorant, never sought for investment advice, never ready to take risks and expected that luck will suit them. Such investors lose huge amount of money because of ignorance. Had they sought advice from the investment specialist? The worse could not have happen. Skills on the other hand play a pivotal role in determining whether an investors will make it in financial markets or not (Blanchard & Watson, 2002). For example, a person who evaluate market risk and decide based on the analysis and the information in their hands that it is the right time to invest end up being able to recoup huge amount of returns compared to other investors who conducts no research and expects everything to work for them. It does matter how wealthy you are because markets are dynamic and ever-volatile to suit any investors’ timely needs (Boehlje, 2012). Therefore, it is upon the investor to do their calculations and decide the proper time to invests and behave accordingly.
You have been made to believe that the market will award those that take on higher systematic (beta) risk. Thus, to manage your investment risk (standard deviation) you can do no better than setting up the fully diversified portfolio. Discuss the validity of this principle in the real world.
Relation between Stock Price Volatility and Risk
Investment has become a risk business today just like any other business venture. It is worth noting that it is quite difficult to have a single pool of investment with kind of an investment vehicle. Investors have become wiser and are devising ways of reducing the marketing risk by diversifying in the pool of investments (Carfì & Musolino, 2011). They tend to invest in different areas that cover diverse markets and thus have an assurance that their investments cannot all at once generate negative returns in their near future. Therefore, it has remained prudent for someone to invest in agriculture, energy, transport and manufacturing industry in a bid to reduce the level of risks they are encountered with. To do this requires expertise of understanding how one can correlate different kind of investments and have their beta go down to less than (Carfì & Musolino, 2012). However, this requires huge discipline to the investors. Lack of discipline from the investors causes them to have low returns generated in a bid to win the market to their favor. Most investors who have decided to invest in different industries end up making appealing profit than other investors in different settings. In a bid to generate high returns investors should choose different industries to stake their money (Ewing & Malik, 2016). Diversification is a strategy that came into play when many people realized that they were making losses and they could not have controlled the degree to which they could exercise control on the market behavior. This forced them to behave in a prudent and wise way. Most investment experts have asserted that there is high need to diversify to meet the return goals. After evaluating the trends in the markets people need to identify key market avenues through which they can channel their investments in a bid to generate interest of their concern. Losing focus on this concept makes people make losses. Additionally, investors should know that diversification does not reduce risks to zero but mitigate it to acceptable limits. Based on their risk appetite the investor may decide to completely diversify their portfolio and venture into quite different areas of focus (MacKenzie & Millo, 2003). Additionally, if an investor, is risk averse then the investor may tend to completely diversify the portfolio in very many industries to reduce risk to the limit they deem acceptable. If otherwise, the investor may even choose not to diversify at all.
Sentiment in the Idea of Market Efficiency and Speculative Bubbles
Stock volatility refers to the changes in the stock market that are experienced due to changes in demand and supply of the commodities the investors are willing to undertake. Dynamics in stock is more prevalent in high risky industries compared to industries which guarantee a certain degree of return if some money is staked in such organization (Ng’ang’a, 2017). Therefore, investors should determine the level of risks they want to take before deciding on the kind of industry they want to venture. The high-risk investments tend to have their share vary considerably in the stock market than any other kind of security out there. For example, the firms which deal with energy and precious metals such bitcoin has their security so dynamic (Onen & Tunik, 2017). The variation of the stock price away from mean means that the variances are high so does the standard deviation and thus the high level of risks. Therefore, there is a high degree of correlation between the volatility of stock prices with risks. Therefore, it is necessary for investors to understand the relationship between the stock prices and the number of risk people are willing to accommodate. Stock volatility is directly related to risks. The higher the frequency of change the higher the risk and the higher the returns. Research has it that stock volatility are high in financial markets where the economic performance is poor and low where the economy is high. Therefore, people should have the ability to monitor the movement in stock prices before they make any investments (Vivanco, Elorduy, & Eguía, 2016). Once this has been recognized chances of reporting negative returns will be minimized to a great degree. Therefore, it is prudent to conclude that it is the duty for every investor to monitor the performance of stock they own and relate to the chances of them losing money. Stock volatility in currencies market is quite high than volatility in any other industry since the currencies exchange rate keeps on changing in seconds so does the stock prices in securities market (Voit, 2013). Volatility tends to decline as the market price rises. On the other hand increase in volatility cause the market prices and slum acting against the investor’s interest. Therefore, studying the market has remained to be paramount and all investors should strive to understand so, in order to boost performance and earning on their investments in both long-term and short periods. Sometimes the rate of stock volatility can be at a consistent rate causing the stock prices to change at consistent rate especially when the market one is operating at is stable either in a positive way or negative way. The effect will be consistent.
Implications for Investment Strategies
There has been increasing talk amongst traders that you can mine and parse Tweets and news articles for sentiment (i.e. opinions, perceptions, and feelings) indicators that predict stock returns. How does sentiment fit in the idea of market efficiency and speculative bubbles? What implications does market sentiment have for your Candidate’s strategy?
In the world people are living today, there have emerged investment gurus who share their sentiments on the expected behavior of the market (Voit, 2013). Their sentiments are always informed by the happenings in the market either politically or economically. These occurrences influence how the market is expected to behave and this informs the decision made by such expatriates. Most people forget that their sentiments are vital for the purpose of decision making. However, these sentiments are not always right and the interesting to note is that the sentiments do not have an impact on the market efficiency since the market behavior is affected by the forces of demand and supply and this is something that investors fail to recognize in pursuit of their investments goals. In times of economic bubbles when the stock prices rise above their intrinsic value, their sentiments can be misleading and the investors may run to dispose of their securities only to release at any point in time the economic bubble can burst to cause them to generate loses ((Voit, 2013). Therefore, to some degree, the sentiments of renowned investors may burst affecting the entire market negatively. Therefore, it is upon the investors to make their own decision based on the true market information if they want to succeed and report positive returns. More often, changes in prices in the financial markets or the economic bubbles can be caused by irrational economic behaviors by mega-investors who create artificial shortages by buying in the financial markets causing the supply to go low thus causing the economic bubbles to set in. At the time when everyone wants to buy, they get back and sell off their securities causing the economic bubble to burst and prices slumming (Voit, 2013). Though market sentiments cannot be used to predict return because of the control rest in few people who decide to alter the markets the way they deem fit to suit them. However, in perfect market sentiments of the investors do account.
References
Arthur, W. B. (2018). Asset pricing under endogenous expectations in an artificial stock market. In The economy as an evolving complex system II (pp. 31-60). CRC Press.
Barberis, N., Greenwood, R., Jin, L., & Shleifer, A. (2015). X-CAPM: An extrapolative capital asset pricing model. Journal of financial economics, 115(1), 1-24.
Blanchard, O. J., & Watson, M. W. (2002). Bubbles, rational expectations, and financial markets.
Boehlje, M. (2012). Finacial Risk and Capital Structure. Center for Food and Agriculture Business at Purdue University.
Carfì, D., & Musolino, F. (2011). Game complete analysis for financial markets stabilization.
Carfì, D., & Musolino, F. (2012, July). A competitive approach to financial markets stabilization and risk management. In International Conference on Information Processing and Management of Uncertainty in Knowledge-Based Systems(pp. 578-592). Springer, Berlin, Heidelberg.
Ewing, B. T., & Malik, F. (2016). Volatility spillovers between oil prices and the stock market under structural breaks. Global finance journal, 29, 12-23.
MacKenzie, D., & Millo, Y. (2003). Constructing a market, performing theory: The historical sociology of a financial derivatives exchange. American journal of sociology, 109(1), 107-145.
Ng’ang’a, J. W. (2017). Globalization and equity returns in African frontier markets.
Onen, F. K., & Tunik, ?. (2017). The Determinants of Efficiency in Turkish Banking Sector After Global Finacial Crisis. European Scientific Journal, ESJ, 13(12).
Vivanco, P., Elorduy, J. P., & Eguía, B. B. (2016, August). Entrepreneurial discovery as the main vector of specialized diversification: lessons on how to reach smart specialization. In First SMARTER Conference on Smart Specialisation and Territorial Development, Seville, Spain (pp. 28-30).
Voit, J. (2013). The statistical mechanics of financial markets. Springer Science & Business Media.
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