The mechanism of finance in this market has large maturity periods. The insecurity and inaccurate prediction on the expected rate of returns or even possibility of losses in an investment is defined as “risk” in financial terms. . The Capital Market Theory was created upon the Markowitz Portfolio Model. Their crucial and important assumptions of the above mentioned theory are as follows; • All investors are resourceful investors- Investors follow Markowitz idea of the efficient frontier and thus prefer to invest in ranges of and along the boundary.
Modern Portfolio Theory (MPT) is a theory originally developed by Harry Markowitz which help risk-averse investors to construct a portfolio by maximizing expected return with a given level of market risk by constructing an efficient frontier (Investopedia, n.d.). This theory focus on effect of investment in the overall portfolio risk and return instead of looking at individual assets risk and return alone. A portfolio of various assets that can maximize the return at a given risk level can be constructed. Every investor hopes to see high possible long-term return with the minimum short-term market risk. MPT theory promote that an investor can hold an individual risky asset such as mutual fund but the risk will be reduced and the portfolio will
The first and foremost aim of the Central Bank is to maintain the inflation level to the minimum. The Quantitative Easing policy is differing and very inflationary since it uses money for both lending and keeping as reserves. Nevertheless the economic policy on the other hand states that the effect of inflation will be good when Quantitative Easing is used, when the economy goes down as it will encourage the economy as a whole initially. But it will create problems in the longer run as the effects of such a simulation will be an extreme challenge to deal with when the economy gradually recovers. Secondly, quantitative easing can lead to a fall in the interest rates in the short term and an increase in the rate of inflation in the longer run, hence causing an instability in the financial system as well as an increase in the interest rates, therefore it is essential for the central banks to keep the interest rates
Diversification is the most important component in reaching long-term financial goals. It is important that investors diversify among different asset classes such as stocks and bonds. This decision is usually made in asset allocation served as the core strategic overlay in providing a benchmark before any further tactical or market timing positioning of securities. Diversification could occur across asset classes and geographically too meaning international stocks, allowing for construction of asset combinations with return and volatility characteristics that are acceptable to many investors with different risk tolerance levels and investment goals. When selecting securities to invest in another way of diversifying is to buy securities in the same asset class that are not affected by the same variables such as grocery stores, airline companies, entertainment companies, technology, they are completely different businesses.
Furthermore, with reference to academic literature from Beattice, Goodacre and Thomas enlightened the readers of the similarities in terms of gearing ratio, which both theorist is similar and consistent but differences occur in with the trade-off with tax shield and pecking order with the new issue of shares (McLaney, 2009). Nevertheless, the contrast between the two theorist is the Trade – Off theory argues the effective measure of tax shield for corporations for the business to be successful whilst Pecking Order theory debates that with equity the business can be effective and efficient when allowance is made for the issue of new shares. Prevalently in this matter, when shares are purchased this is an avenue for investment but on the order hand trade-off is against the allowance of new shares and avoids the trade-off of new share issues (Corporate, Finance,
This study attempts to link psychological research, empirical evidence, and asset-pricing theory to examine how investor sentiment affects financial market volatility. We provide insight into that question by exploring different parameter configurations using the general equilibrium model of Lucas . The Lucas model is the most influential asset-pricing model and has been of central importance to modern macroeconomics. Traditional economic analyses are based on the efficient markets hypothesis (EMH), which assumes that people price assets by measuring probability and using all available information, and hence leave little room for investor sentiment. As behavior is motivated by both thoughts and feelings, considering investor sentiment
The interesting issue is that the venture capital fund invariably wants the exit that gives rise to the highest financial gain, while the entrepreneur may want to go public for non-pecuniary reasons even when the financial gain from an acquisition is superior. Acquisition exits are more likely to result when venture capital funds have stronger control rights, whereas IPOs are more likely when venture capital funds have weaker control rights. Similarly, corporate venture capital funds are more likely to use a greater number of veto rights (over asset sales, asset purchases, changes in control, and issuances of equity) and more likely to use debt securities than limited partnership venture capital
Retained earnings are the preferred method of financing according to the pecking order theory. When this source is used up or no longer available and the firm is compelled to use external financing, debt is preferred over equity. Debt is preferred over equity because the agency costs involved with the issuance of debt are lower. An issue of debt signals confidence and it signals that the shares are overvalued. On the other hand, an issue of equity signals that the share is currently undervalued.
This is predicated on the assumption that Modigliani and Miller’s ideal world does not exist. Financial markets are not perfect given taxes, transaction costs, bankruptcy costs, agency costs, and uncertain inflation in the market place (Abor and Bokpin 2010). According to Bierman and Hass (1983), managers usually address the dividend payout level in the context of forecasting the firm’s sources and use of funds (Abor and Bokpin 2010). Considering future investment opportunities and the internal cash generation potential of the firm, both capital structure and dividend policy are chosen to secure that sufficient funds are available to undertake all profitable investments without handle new equity (Black, 1976). So, one of the most important constraints of investment decision in general and capital investment expenditures in particular is dividend policy.