Portfolio Strategy (Essay Sample)

[Portfolio strategy]
[Name]
[Institution]
Introduction
The firm I have chosen to plan a portfolio strategy for is known as O'Connor and Associates. It is an organization where I currently work; it will be difficult encounter to create one of them. It is a property tax firm which assists clients with decrease the appraised value of their property, and in turn the property taxes due amount. The company is diversifying; it is leading to the third party collection, mortgage loan judgment recovery.
The company has a history in the past whereby there was a substantial error and in order to understand the effect and the cause of those errors we would have to model their market and business behavior. The model is however an effort to estimate the expected outcome of alternative processes and strategies. Consumer expectations and various variables, as well as internet, technology, globalization, and telecommunications, have accelerated the pace of transformation and reduced product lifecycles has contributed to this strategic plan. Technology has augmented the capability to mass information and respond to change analytically. It is also more significance for corporations to achieve and maintain their competitive advantages.
Cash Infusion
The infusion cash allocated to enhance the firm and to manage $ 40 million. Following is a description of the portfolio of assets and portfolio strategy in relation to $ 40 million investment that the company would use to maximize wealth:
The Portfolio Strategy
To analyze a diverse concern like introduction of an independent growth path to a high-risk organization, to capture the portfolio strategic risk in an appropriate manner, measurement of risk and value at the portfolio level. It is essential to create a structured approach which would assist senior managers to understand the impact of portfolio decisions on risks and values of corporate level portfolios (Jenner, & Kilford, 2011).
O'Connor and Associates to achieve the goal of wealth maximization will use an active portfolio strategy. Under this strategy, managers will use available forecasting techniques information and to ensure better performance as compared to a portfolio that is simply classified. For, instance an active common stock strategies include price/earnings ratio, forecasts of future earnings, (Fabozzi, 2002). Equally, bond portfolio, which are actively managed, include forecast of future sector spreads and interest rates. Additionally, active portfolio strategy, which involves foreign securities, is usually required forecasts of exchange rates and local interest rates.
In regard to this strategy, people at the top management level will make decisions that are necessary to maintain firm's financial performance. They can also achieve non-financial goals such as performing corporate social responsibilities effectively and create a concrete brand image in a larger market. According to Smithson, Et. El. (1988), "To acquire a measure of the sensitivity of the value of the company to changes in the financial prices, we must first define the basis for the measure. It can be a "flow" (single-period) measure like the maturity gap analysis above or "stock" (multi-period capitalized percent value) measure such as duration" (p. 394).
Alternative major production cost, which is necessary, is insurance to protect against losses. According to Doherty, et el. (1977), "…insurance purchases can increase shareholder value by:
• Avoiding underinvestment, problems faced by firms whose financial solvency (or liquidity) could be threatened by unlimited losses:
• Transferring risk from non-owner corporate stakeholders—managers, employees, suppliers—at a disadvantage in risk-bearing;
• Providing efficiencies in loss assessment claims processing and prevention;
• Reducing taxes; and
• Satisfying regulatory requirements" (p. 477).
In addition, internal controls are an essential tool to assist with failure prevention. The closure of the capital markets as a mechanism for motivating transformation we are made to depend on the internal control system. Also, to act and to preserve the company assets, both human and otherwise (Jensen, 1995). The complications that motivated much of the control activity of the 1980s in the American Corporate are now reflected in a financial distress, pressures for restructuring lackluster performance (p. 522).
Portfolio Construction
After classifying a suitable portfolio strategy, the next step is to choose the specific financial instrument to include in the portfolio. Financial instruments are known as securities. The development of an efficient portfolio requires an evaluation of each security.
An efficient portfolio will provide the greatest expected return for a given level of risk to O’Connor and Associates.
The development of an active portfolio begins with an analysis of the factors that have historically determined the return on the index. Once these factors are identified, then the index can be decomposed into these factors or strategic managers can be able to identify the risk profile of the index based on these factors (Fabozzi, 2002). Inactive portfolio strategy, a deliberate decision is made by the portfolio manager to create a portfolio that departs from the risk profile of the index by accepting a smaller or larger exposure to one or more factors.
Only O’Connor and Associates Managers that are effective to maximize the returns to shareholders and minimize the portfolio risk will consider those assets in the portfolio. In this concern, managers will consider the common stock in the portfolio. One of the factors that control the risk profile of a stock index is the composition of the index in terms of industry sectors. At the same time, the portfolio manager also has capabilities to select industry sectors that can outperform and underperform. It is the reason that the portfolio manager over weights the industry sectors that are expected to outperform and underweight those are expected to underperform (Amenc & Sourd, 2003). The managers at O'Connor and Associates, in order to identify additional securities he would use both capital assets pricing model and multi-factor asset pricing model.
Along with this, other assets such as risk-free securities, government bonds, firms in the portfolio will also consider preferred stock. Executives will make decisions regarding different market scenario reflecting the uncertainty around the product profile in order to assess the effectiveness of portfolio. Executives may also decide to use Markowitz two assets portfolio model to evaluate portfolio (Reilly & Brown, 2011). As, managers are accomplishing an active investment portfolio against a well-defined benchmark; their main aim is to produce a return that surpasses that of the benchmark. Also, to minimize the portfolio’s returns volatility relative to the benchmark. For example, the return on a two-asset portfolio (50% weight to each security) can be expressed as below:
E[R p] = W1 E[R1] + (1-W1) E[ R2 ]
Where,
E (Rp) = Expected portfolio return,
W1 = w...