Reword the three finance case questions.

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12. Typical Step or Investment Philosophy for Investment Decision in the Imperfectly Efficient market Typical investment decisions in imperfectly efficient market requires based on risk rather than opportunity costs when allocating over-/undervalued assets. As for the risks, investors are more exposed to volatility, thus, they are riskier. In the imperfect efficient market, market is semistrong. Therefore, the investment requires mix of passive and active strategy. Because some securities and sectors being mispriced, investors ignore to take advantage of undervalued stocks. Thus, investors will remain passive because it is efficient and cost less. While some choose active investment approach. Here, some investors will try to analyze the given information that is reflected to the price. Next step requires investors to take after active investment with the characteristic of imperfect efficient market. The active investment approach attempts to identify any mispricing related to timing of the performance in the market. This allows investors to identify stocks that outperform the market. However, not “all the information” is readily available for investors in the imperfect efficient market. This implies that expected stock price does not always reflect with actual pricing of expected return in future. Therefore, imperfect efficient market exposes investors to unknown risks associated with pricing of stocks in overvaluation and undervaluation. Considering the fact that investors expect stock prices to be reflected to the information in efficient market, this type of condition creates different results for various investment portfolio for investors. Investors will need to select portfolio within various industry to decrease its asset exposure to volatility. They are encouraged to diversify its portfolio to level off any excess risk. There’s always risks associated within the portfolio. In theory, risky assets earn higher average in longterm investments. This guarantees only high return through long-term investments over short term investments. Typically, investments with higher return are obtained through short term investment with volatility. To maximize return, investors are required to allocate various risks and returns. In addition, the standalone risk is reduced due to diversification on large cap stock. This will outperform than the individual securities. As for the alpha, investors need to select the highest alpha in the portfolio. By selecting alpha larger than 0, this determines that asset is undervalued. Therefore, investors will embrace higher returns on its investment. The size of the investment is also important in maximizing the return and minimizing the risks in the volatile market. 13. Statement of Investment Philosophy for the Group’s Investment Company Maximizing shareholders’ wealth is the primary goal of any incorporated, professional asset management company. Besides, we also need to secure our customers’ assets against any unbearable risks. Therefore, the statement of investment philosophy of the company is very important. We will develop our investment strategies with great consideration for portfolio construction, diversification, and risk management. We acknowledge the importance of diversification in our portfolio, and focus on creating a well-managed diversified portfolio that can eliminate the firm-specific risks and promise a secured return. Our attempt to diversify the portfolio is not only within asset allocation, but also in the security selection of each of those asset classes, especially the stock market. Therefore, the design of our portfolio mostly follows the topdown strategy, which is to allocate the amount of investment in each asset class and then select the type of securities for each of them. We follow both the strategies of growth and value investing, with greater attention on value investing when constructing our portfolio in the stock market. Value investing is the investment in stocks that are considered undervalued when compared its price with other fundamental analysis. In the process of pursuing these undervalued assets, we pay great attention to analyzing these assets in order to adequately assess their evaluation, and thus deliver good performance of our portfolio. Based on these observations, we attempt to seek for these undervalued assets in constructing our portfolio. In consistence with our goal which is to generate profitable return and avoid risks, we construct our investment with greater portion in medium to large cap stocks, and in industry that has historically high sales growth rate and high return on invested capital in order to maintain the good performance of our portfolio. We also utilize the method of portfolio optimization to ensure the best profit for our investors within a reasonable range of risks. We acknowledge the differences in characteristics, risk and return potential of all segments in the stock market, and attempt to diversify our portfolio within all these segments with the appropriate portions of investment. We aim to construct long-holding portfolios, and encourage our investors to hold their stocks in longholding periods. We believe that with this tactic, the investors, as well as ourselves, will have better chances to maintain the profits through bear market. Our method for risk management focuses primarily on managing and coordinating our fund managers in working towards the company’s goal, as well their individual portfolio goals. We believe the collaboration between all managers will help address the risks in the market more quickly, while ensure that the portfolios are functioning on the right tracks. By using our effective investing strategy, we will consistently achieve our primary goal, which is maximizing our shareholders’ wealth. 14. Supporting Facts for Our Company’s Investment Philosophy 1. Good & Bad News does not affect the decision of value investing 2. Value investing produce slowly and consistent gains 3. Long holding period gives the opportunity to ride out the highs and lows 4. Holding stocks longer allows lower capital gain tax rate 5. Less trading = less commission/trading fees 6. Holding stocks longer will give more accurate of data rather than fluctuation of prices. 7. Holding on investments longer allows compounding 8. Long-term investments are easier to correct investment mistakes 9. Not worried about having bull market and bear market 10. Long term holding are less volatile 11. Long term investment save transaction cost 12. Long term investment builds risk tolerance 13. Long term holding fights inflation 14. Large cap stocks are stable 15. Large cap stock pays dividend 16. Small cap stock has low valuations 17. Small cap stock has potential to change overtime 18. Mid-cap stocks are readily able to convert to large cap stocks 19. Mid & low cap stocks have high potential growth rate 20. Top-Down investment strategies allow diversification 21. Portfolio optimization integrates an analysis of risk 22. Portfolio optimization integrate an analysis of strategy 23. Portfolio optimization integrates an analysis of valuation 24. Investment in technology and pharmaceutical give higher growth rate 25. Over the long term, stocks have historically outperformed all other investments. 26. Risky assets generally pay more than safe assets. 27. The stock market is semi-strong form efficient. 28. Value stocks historically outperformed growth stocks on average. 29. Larger cap stock has lower risk 30. Smaller cap stock has higher risk 31. Holding on investment longer lowers risk aversion 32. Dividends payment shows that the company stabile 33. Diversified asset will eliminate risk 34. Asset allocation will help counter market uncertainties 35. Top-down strategy removes the firm-specific risk. 36. Value investing seeks for undervalued stock (devalued assets) 37. Value investing does not require extensive background in finance 38. Value investing has margin of safety 39. Value investing does not follow the "herd" 40. Value investing does not get affected by day to day price fluctuation 41. Passive investing reduces expenses 42. Investment in stocks are more profitable 43. Investment in stock has an average annual return of 10% 44. Stocks are easier to sell 45. Technology & pharmaceutical sectors are always advancing 46. Risk return have low risk but high return 47. Long term investing gives investor less stressed 48. Passive management holds diversified portfolios 49. Passive management does not allow mispricing 50. Diversifying reduce bear and bull market 51. Diversifying asset will not fluctuate assets as much 52. Long term holding are usually 3, 5 or 10 years, but 20 will be better 53. Risk management allows investors to have financial consideration 54. Risk management identifies key risk 55. EMH allows relevant information into prices 56. EMH does now allow mispriced assets 57. EMH does not allow "free lunch" 58. Long holding prevents "overconfidence bias" 59. Passive Investment prevents Myopic loss aversion 60. Passive investment prevents regret avoidance bias 61. Example of risk management is important was when Lehman Brother's top level management refused to heed warning and continued to bet the real estate market. 62. There should be a balance between return and risk 63. Value stocks are cheaper than growth stocks 64. Value stocks tend to have lower P/E ratio 65. Value stocks tends to offer dividends 66. Average annual return of value stock is 13.30% 67. Balanced portfolios are not as volatile, and has an average annual return of 11.59% 68. Growth stocks are companies with above average earnings and sales growth 69. Growth stocks usually have higher stock price 70. Investors of growth stocks receives return from capital appreciation 71. Growth stocks are expected to grow at a rapid rate 72. Value funds offer investor more protection during selloffs 73. Growth funds lead the pack in market rallies 74. Every investor should have a combination of both growth and value stock. 75. Growth stock have an average annual return of 8.81% 76. Invest in both growth and value allows diversification 77. Passive investing allows fund managers to focus in company goal's rather than individual goals 78. Example of famous value investor: Warren Buffet 79. Small cap stocks are more risky than mid and large 80. Mid cap stocks receive less coverage by wall street analysts which prevents mispricing 81. Investors can gain advantage by buying growth stocks due to exposure of evolving industries 82. Small and mid-cap stocks tend to outperform large 83. Mid-caps does not move with the broader market (large caps) nor move with small caps 84. Short term holding is costly versus long term holding 85. Chances of losses are higher in growth stocks 86. Investing in single sector can be risky 87. Short term holding has high tax on capital gains 88. Short term holding has higher brokerage commissions fees 89. Not always guaranteed profits in short term holding 90. Never invest all your capital into a single equity 91. Warren Buffet believes that investing in business that you like are important 92. The more risks one takes, the more he or she should get paid 93. Calculating intrinsic value will change the future cash flows and interest rates 94. Market risk is non-diversifiable 95. A negative alpha is an indication that a stock underperformed 96. Long term investing results in less taxes paid overall 97. Focusing on the intrinsic value of an asset is key 98. There is no finite method to investing 99. Inverse relationship between interest rates and prices of bonds 100. Assets that directly go into production of goods and services are real assets.
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Running header: INVESTMENT IN AN IMPERFECT MARKET

Investment in an Imperfect Market
Student’s Name
Institutional Affiliation
Course

INVESTMENT IN AN IMPERFECT MARKET

2

Steps of Investing in an Imperfect Market
Most decisions on investment made in the imperfect type of market need to be based not
on the opportunity cost, but on risk during the allocation of assets that are undervalued or
overvalued. When we consider the risk factor, most investors will be more exposed to changes
and will therefore be riskier. In an imperfect market setup, the market is said to be semi strong.
Hence, investing in such a market will need a combination of both active and passive strategies.
Since some sectors and securities end up being mispriced, the investors will fail to take
advantage of investing in stocks that are undervalued. In this case, the investors will choose to
stay passive since it is cheap and more efficient. Other investors will choose to go the active
investment way.in the case of active investment, some of the investors will attempt to study the
available information relating to the prices. Next, the investor will undertake active investment
with features of an imperfect market.
The approach of active investment tries to identify any aspects of mispricing that are
related to the timing of market performance. This will allow an investor identify the type of stock
that can outperform others in the market. One of the features of an imperfect market is that
information is not readily available. This means that the anticipated price of stock will not
always reflect the actual value of returns expected in the future. Hence, the imperfect market
setting will expose the different investors to various types of risks that are associated with stock,
in either undervaluation or overvaluation. Since the investors will be expecting the stock prices
to be reflected in the information in an imperfect market, this kind of condition will create
different kinds of results for the different investment portfolio.
Investors shall be required to choose portfolio among different industries so as to reduce
the exposure to risk. Investors are therefore encouraged to diversify the portfolio to a level of
minimum or no risk. Portfolio will however have some risk associated with it. According to
theory, the risky assets will generally have higher returns when invested in the long-term
investments compared to assets that are of low risk. This will therefore guarantee higher return in
the long-term investments and not in the short-term investments. Those investments that have
higher returns emanate from short term investments of high volatility. In order t maximize
returns, the investor will be required to allocate the different risks and r...


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