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Portfolio Management Assignment Sample

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Portfolio Management Assignment Sample


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The report has analyzed the different theories of asset valuation. It has provided an overview of the theory of value, power theory of value and intrinsic theory of value. The main purpose of the report was to evaluate the theories to apply them in a new market. The theories are mostly used by the investors to ensure that they can make effective decisions about their investments. It has been observed that the UK market is witnessing a downfall due to huge losses in different sectors of the country. It can be said the capital Asset pricing model would be suitable for applying to make investments in an emerging market. 

Executive summary

The report has critically analyzed the theories of value which had different approaches and provided formulas to determine the value of money for specific markets. The theories are evaluated to invest in an emerging market by weighing the risk factors of the market. The main purpose of this report is to provide an effective theory that can lead to higher return exchange by analyzing the value of risks. The market risks of a developed country and an emerging country would be different. However, the application of the capital asset pricing model can reduce the level of risk for making investments and can ensure higher profits in exchange.

Part A: Critical evaluation of theories

Asset valuation is a method that can determine the fair market. Moreover, asset valuation uses book value and discount models. Market, income, and cyst are the methods of valuation (Ling and Abdul, 2019). It has been observed that asset valuation can play an important role in finance. The asset valuation is made from objective and subjective measurements. Capital assets and property plans are the two most important assets of a company.

Theory of Value 

The theory of value has come from economic theory. This theory makes an effort to describe the exchange value. In asset valuation, there are some methods such as cost methods, market value methods, the right price, standard cost method, loan application, and many more (Atta-Darkua, 2020). All methods have different work in different aspects.

The equity value

The equity value builds the company’s share value and loan value. The equity value consists of adding the current share price and total shares outstanding (Zaidi and Bhutta, 2021). Moreover, the equity value can be shared with the value of the shareholders’ loans. 

Enterprise value

The company’s total value can be measured through enterprise value (Lazarev, 2019). Moreover, the equity market is used as a comprehensive alternative. The enterprise can measure the worth of the business. It has been observed that the value of a firm value can not affect the capital structure. 

The difference between equity value and enterprise is both are used in the valuation as well as business sales (He et al. 2020). By including the market capitalization the company’s business can calculate enterprise value. Additionally, in order to have redundant assets, the enterprise value can add equity value.

The theory of value can be considered as the determinant to measure the value of products and services. The studies of classical political economists suggest that the value of goods and services can be found in production. It can be further argued that a majority of the cost of production is reduced as the costs increase for the laborers (Ricci, 2019). However, the perspective of neoclassical economists was that the value of products can be determined from the market act of exchange and introduced the theory of marginal value. It has been observed from the various studies that the theory of value intersects the concepts and patterns of both economics and philosophy (Milios et al. 2018). It can be said that the theory of value has been considered with the analysis of two main factors which are the cause of economic growth and the factors based on income are distributed in rent, wages and profit. 

Intrinsic Theory of value 

The theory explains that the value and worth of any product, good, or service are intrinsic which means that the value is in the product itself (Lim et al. 2020). The main purpose of this theory is to measure the exchange of value. It is also used to know the price of a product or service. The importance of intrinsic theory is it helps to understand the investors. Moreover, it can successfully measure whether the asset cost is overvalued or not. Besides that, intrinsic value can be said to be an inherent reward such as social justice and creativity. The company can be motivated by using values such as social status, personal security, self-image, and many more. 

Power theory of value 

The theory focuses on the processes so that the dominant powers of the society, especially the corporations and the higher classes can measure the value of their assets (Warue et al. 2018). It can be further argued that this is a process of capitalization. The goal of this theory is to increase the worth and value of their current assets which are achieved by beating the current rate of exchange and return. This theory is mostly used to increase the share of income and the wealth of a society.

Mean-Variance analysis

Mean-variance can be considered as a process to measure the risk which is denoted as a variance. It has been observed from the studies that mean-variance is used so that the investors can overview the analysis and make their investment decisions (Gollier,2018). It can be further argued that it is mostly used by investors to measure the risk factor and their influence on different levels of business opportunities. In order to build investment decisions, the investors use mean-variance. By using mean-variance analysis investors can know their risk. The analysis of mean-variance helps the investors to reduce the threat so that they can make investments with the least risk for the exchange of profit returns (Schoultz et al. 2022). However, it can be said that it helps the investors to determine the maximum profit or return they can achieve from a specific risk (Perrine, 2018). It can further be said that mean-variance is a tool of modern portfolio theory which suggests that investors can make effective decisions if they can acquire relevant information (Hyde, 2018). It can be said that the two main factors of mean-variance analysis are variance and expected return. 

Portfolio Optimization 

Capital Asset Pricing Model (CAPM)

It is a model which is used by the investors to identify the relationship of systematic risk with the expected return that too specifically for stocks and assets. It can be said that this model of CAPM is mostly used to increase the finances with the analysis of the value of risk securities so that they can generate expected returns for their invested assets. The risk free rate which is suggested by the model accounts for the time value of money (Bao et al. 2018). The other important components and factors of the CAPM formula globe prominence to the additional risk by the investors. 

Part B: Rationale

The country's growth and expansion of the market are influenced by some factors such as natural resources, capital formation, economic system, and many more. In this study, the CAPM model has been used in order to explain the relationship between particular stocks and systematic risk (Zakharkina and Abramchuk, 2018).There are many factors that influence the growth and expansion of the market of a country. However, it has been considered that £150 million pounds will be invested following the approaches of the CAPM model. This model has been considered so that it can be evaluated whether the stock is riskier or not. It can be said that the model can help in evaluating the risk factors of emerging markets and developing markets. It has been reported that the construction sector is the only sector of the UK that had a growth of 0.8% at the pre-pandemic level (Wei, 2018). It can be further argued that the assets can be invested in the construction industry of the UK. It is one the largest and leading countries in the world. It can be further said the global CAPM can be used for investing to measure the expected return on a stock or an asset. It has been observed from the reports that the value investors had to witness a terrible time and the resurgence of value stocks the UK was still stronger than other countries. It has been observed that the resurgence was quite mild in the US and the stock market was SPX, -0.72% (Marketwatch.com, 2021).

Part C: Application of theories

In order to calculate the value earnings ratio the equity value is generally used. Moreover, the equity value provides a better sense to the company (Atta-Darkua, 2020). In order to reduce redundant assets, the equality value includes enterprise value. On the other hand, capitalization is one of the parts of the power theory of value that helps the company to measure its performance.

The market portfolio consists of the securities which are measured by the market capitalizations however it has the highest market expected return assessing the level of risk. The assets will be invested in the emerging markets rather than the market of the UK. It has been observed from the reports that the equities of the UK were lower as it had to witness losses at different levels of the market including Tobacco, life insurance and beverages has propelled lower shares. It can be further argued that the UK fell by 0.35% to achieve a new 3 month low (Investing.com, 2022). The stocks declined which was outnumbered by the rising stocks 1542 to 552 and it ended on the stock exchange of London. It can be further argued that investments in the UK market can lead to a higher risk for the value of assets. However, there are also many opportunities for the emerging markets to grow. In the trading of commodities, crude oil was higher in April by 4.34% which was about to hit $120.70 (Investing.com, 2022). 

In a long-term investment, the CAPM will allow this organisation to understand the risk in developing markets, which will allow them to consider their risk and allocate their assets in profitable stocks. This aspect is important to maintain a positive growth pattern in the investment. Thus, it can be said that CAPM model will allow Lazardi Investment Management to improve its asset management practice in emerging markets. However, regarding this action; it is important for them to consider emerging sectoral trends, which can drive their overall growth in these emerging markets (Pei, 2019). However, it has been observed from the reports that the markets were highly impacted due to the effects of Covid-19. 

Part D: Conclusion

The different theories of asset valuation included the theory of value and mean-variance. The theory of value is required to understand the importance of the value of different investments. Mean-variance was done to understand the risk prospect of investment. Moreover, CAPM model was done to understand the relation of risk and total gain, which was primarily used in this report to understand the activities of Lazardi Investment Management regarding their investment in emerging markets as these markets have a higher probability of growth than developed markets. This understanding is important for them to reduce risk and increase their investment growth over the long term. 

The main purpose of the theory of value is that the company can understand their business profit by understanding the prices. On the other hand, mean-variance is used to maximize the expected return (Gardner, 2019). In order to maximize, investment rewards are the targets of mean-variance optimization.

On the other hand, the recent effect of Covid-19 had a negative effect on the global market, which can be a greater opportunity for this organization as during this time the market has significantly dropped (He et al. 2020). This creates an opportunity for this company to invest in these markets for additional growth when the market corrects itself. Considering this aspect provides them with a double opportunity, which allows them to gain from the overall market growth in the long term; however, investing in a fallen market will allow them to gain more leverage over their investment. During the pandemic, it has been observed that covid-19 has made an impact on the company’s profit. After the pandemic, the company’s sales are expected to be +0.25% (Ozili and Arun, 2020). The company of the UK is continuously recovering its business growth through finding opportunities.

Reference list 

Atta-Darkua, V., 2020. Corporate ethical behaviours and firm equity value and ownership: evidence from the GPFG's ethical exclusions. Available at SSRN 3388868.

Bao, T., Diks, C. and Li, H., 2018. A generalized CAPM model with asymmetric power distributed errors with an application to portfolio construction. Economic Modelling, 68, pp.611-621. Available at https://www.researchgate.net/profile/Te-Bao/publication/316371267_A_generalized_CAPM_model_with_asymmetric_power_distributed_errors_with_an_application_to_portfolio_construction/links/5a1c418aa6fdcced952b4d54/A-generalized-CAPM-model-with-asymmetric-power-distributed-errors-with-an-application-to-portfolio-construction.pdf[Accessed on 09.03.2022]

Gardner, J., 2019. Allocating in the presence of dominance: a mean-variance portfolio choice economic experiment. Gettysburg Economic Review, 11(1), p.4.

Gollier, C., 2018. Ethical asset valuation and the good society. Columbia University Press.

He, Q., Liu, J., Wang, S. and Yu, J., 2020. The impact of COVID-19 on stock markets. Economic and Political Studies, 8(3), pp.275-288.

He, Z., Hu, M.R., Wang, Z. and Yao, V., 2020. Political uncertainty and asset valuation: Housing prices in hong kong. National Bureau of Economic Research.

Hyde, D., 2018. Is there a need for intrinsic values in conservation biology?. The Australasian Journal of Logic, 15(2), pp.498-512.

Investing.com, 2022. U.K. shares lower at close of trade; Investing.com United Kingdom 100 down 0.35%. Available at https://in.investing.com/news/uk-shares-lower-at-close-of-trade-investingcom-united-kingdom-100-down-035-3113593[Accessed on 09.03.2022]

Lazarev, V.A., 2019. Preserved Value Approach for Asset Valuation. Advances in Economics, Business and Management Research, 47, pp.165-168.

Lim, S., Kim, M.J. and Ahn, C.W., 2020. A genetic algorithm (GA) approach to the portfolio design based on market movements and asset valuations. IEEE Access, 8, pp.140234-140249.

Ling, T.W. and Abdul Wahab, N.S., 2019. Components of book tax differences, corporate social responsibility and equity value. Cogent Business & Management, 6(1), p.1617024.

Marketwatch.com , 2021. Opinion: I’m a former chief investment officer, and this is why I don’t see a long-term future for value investing. Available at https://www.marketwatch.com/story/im-a-former-chief-investment-officer-and-this-is-why-i-dont-see-a-long-term-future-for-value-investing-11627410668 [Accessed on 09.03.2022]

Milios, J., Dimoulis, D. and Economakis, G., 2018. Karl Marx and the classics: An essay on value, crises and the capitalist mode of production. Routledge. Available at https://www.academia.edu/download/15915539/milios-marx-and-the-classics.pdf[Accessed on 09.03.2022]

Ozili, P.K. and Arun, T., 2020. Spillover of COVID-19: impact on the Global Economy. Available at SSRN 3562570.

Pei, G., 2019, January. Empirical Study on the Listed Banks of China: Based on the CAPM Model. In 2019 International Conference on Intelligent Transportation, Big Data & Smart City (ICITBS) (pp. 642-644). IEEE. Available at https://ieeexplore.ieee.org/abstract/document/8669553/ [Accessed on 09.03.2022]

Perrine, T., 2018. Basic final value and Zimmerman’s the nature of intrinsic value. Ethical Theory and Moral Practice, 21(4), pp.979-996.

Ricci, A., 2019. Unequal exchange in the age of globalization. Review of Radical Political Economics, 51(2), pp.225-245. Available at https://www.researchgate.net/profile/Andrea-Ricci-16/publication/323916413_Unequal_Exchange_in_the_Age_of_Globalization/links/5d9def23458515df0ae88988/Unequal-Exchange-in-the-Age-of-Globalization.pdf [Accessed on 09.03.2022]

Schoultz, M., Öhman, J. and Quennerstedt, M., 2022. Experiences of intrinsic values in education for older adults: insights from a Swedish senior university. European Journal for Research on the Education and Learning of Adults.

Warue, B.N., Charles, B.J.M. and Mwania, P.M., 2018. Theories in Finance Discipline: A Critique of Literature Review. The University Journal, 1(2), pp.113-146.

Wei, D., 2020. The Practicability Test of CAPM Model in China Security Market. The Frontiers of Society, Science and Technology, 2(9).

Zaidi, S.H. and Bhutta, N.T., 2021. Liquidity Synchronization and Asset Valuation in Selected Emerging Asian Economies. Asian Economic and Financial Review, 11(6), pp.488-500.

Zakharkina, L.S. and Abramchuk, M.Y., 2018. Correctness of the CAPM-Model application in the Ukrainian reality in terms of investors financial security.

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