Investment Strategy

Posted on March 11, 2022 by Cheapest Assignment

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The most appropriate broad investment strategy that would be recommended to Ms Zap is the value investment strategy. The value investment strategy refers to an investment strategy that requires the investor to purchase assets at a lower value compared to their intrinsic value. Value investors are referred to as bargain shoppers because they search for stocks believed to be undervalued. Value investors search for stocks with prices believed to be lower than the real value of the security in the stock market. The strategy is based on the idea that there is a level of irrationality that exists in the market. The irrationality presents essential opportunities to find stock at discounted prices and then benefit from the stock by selling later at a high price (Salem, 2011). Stockwork in a way that the stock prices of a firm can change even in cases where the valuation of a company remains the same. Stocks like other products in the market go through high and low demand periods and thus their prices fluctuate. However, wise decision making will ensure that the investor gets the best value for their money. Value investing involves doing investigations to find out about secret sales on different stocks and then buying them at discounted prices compared to their real value in the market. The investors benefit from big rewards after selling these stocks. 

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As the chief investment officer of pension funds, Ms Zap can advise the company to invest in different stock portfolios using the value investment strategy. First, portfolio analysis of different stocks will need to be done to find the most profitable stocks to invest in. This analysis computed different portfolios by selecting different stocks from different industries and sectors (Salem, 2011). Further, it evaluated the returns on individual portfolios by allocating equal weights to each of the stocks in an individual portfolio. The results on returns and standard deviation are documented in the attached excel file. Generally, the analysis suggests selecting different stocks and allocating weights to each result in different portfolio returns (Salem, 2011). Each of the portfolios however returned a positive performance.

The analysis used standard deviation as a measure of risk. Based on the findings, high risk suggested a high return. For instance, a portfolio with a 5.3% standard deviation presented the highest risk elements. However, it also returns 0.44 percent, the highest amongst all the portfolios computed. Therefore, the higher the risk a portfolio presents, the higher its returns too. However, the sole purpose of selecting different stocks into the portfolio was to mitigate risk through diversification. 

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The First company selected is the American Express Company (AXP). The American Express company is ranked among the best performing firms in the credit industry. The company is involved in charging credit card products and travel services. The reason for selecting this firm is that compared to its competitors in the credit industry, American Express recorded a revenue increase of 26285.53 % in the third quarter of the 2021 financial year and an average revenue growth rate of 869.03 %. The second company portfolio selected is Amgen. (AMGN). Amgen Inc develops, produces and distributes therapeutics globally. The focus is on oncology, inflammation, cardiovascular diseases and bone health. The company is projected to earn its shareholders $4.09 per share. This would represent a yearly decline of 6.41%. The Zacks Consensus Estimate for revenue is projecting net sales of $6.7 billion, up 4.35% from the year-ago period. Apple Inc is the best performer in the phone and internet services industry.  The economic aspect of the industry, therefore, affects the organization in a significant way. Other, highly competitive organizations within this industry include Dell, HP, Gateway, and Sony. Like Apple, these organizations are involved in the production of computer-based products and they are highly competitive in this activity.

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This analysis selected portfolios based on their risk to return characteristics. The risk was represented by standard deviation. Based on risk-return characteristics, the 5 stock and 6 stock portfolios had the highest return characteristics, one with 4.1 percent and the other with 0.44 percent. However, the portfolios with high returns also presented a high risk. In fact, one of these portfolios presented 5.4 percent in risk. The underlying assumption under each of these portfolios is that the stocks are less correlated hence an adverse effect on a single stock is sufficiently compensated with the alternative stock in the same portfolio. Therefore, continuous portfolio diversification and analysis will enhance improved stock performance over time compared to the benchmark.

References

Salem, R., 2011. International Portfolio Diversification Benefits for Middle Eastern Investors. [online] Available at: <https://www.researchgate.net/publication/328403388_International_Portfolio_Diversification_Benefits_for_Middle_Eastern_Investors> [Accessed 14 August 2021].

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