The Portfolio Combination - Essay Example

A portfolio company having high risk may financially endanger the financial output of a company having minuscule risk. Portfolio analysis should include the influence of risk on the company’s returns (Livermore, 1998, p. 584). CAPM is used to determine the relationship between risk and portfolio returns. In terms of question 1b, the Capital Asset Pricing Model (CAPM) is used to determine the effect of the risks on the returns. The CAPM model includes the risk-free rate of the return portion of the asset return. The CAPM is used to determine the expected capital asset return. The CAPM analysis includes a risk-free rate. The CAPM includes a risk premium and a market premium (Semmler, 2011, p. 106).

The portfolio CAPM formula is shown in the following diagram:
E(Rp) = P1R1 + P2R2…+ PnRn
Further, the formula is used to whether the average return on a portfolio of stocks is positively related portfolio’s beta data. The limitations include a wrong proxy being chosen. Another limitation is that financial economists had not discovered a foolproof they that explains why investors demand premiums for investing in low price/earnings for converting such concepts into risk premium estimations (O'Byrne, 2001, p. 180). In terms of question 2a, there are several motives for taking over another company. First, the “economies of scale” theory dictates that some entities or corporations take over other companies to increase revenues. The total revenue of two companies will normally be higher than the revenue generated by all companies, given that the total sales of each company or equity is similar, under the synergy principle. Second, some companies take over other companies to acquire the other company’s current and prospective customer database. Third, takeovers allow the new owner to acquire the expertise of the acquired company (Nuchtern, 2008, p.4). Fourth, companies will take over another company to control the local market. Local companies can buy a foreign competing company to protect the local market segment. In terms of question 2b, mergers and acquisitions contribute to shareholder value and increase the acquiring company’s financial output. First, mergers and acquisitions can reduce the effect of the current competitors. One company can acquire or merge with a competitor company.
The combined company will generate higher profits. Implementing the synergy principle, one company plus one company is equal to three companies. The combined company’s marketing strategy will overshoot the financial performance of the two combined companies separate financial performance. Second, one company can merge or acquire a supplier company to prevent a halt in the company’s supply needs. Third, one company can acquire or merge with another company to diversify its products or services. A company that is engaged in a restaurant business can acquire or merge with a wedding advice company to persuade the acquired wedding company’s clients to have their wedding reception in the company’s parent company, the acquiring restaurant (Simmons, 2006, p.275). Read More