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Finance Assessment - Essay Example

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Finance Assessment

In this concept one stocks performance is benchmarked by the performance of another stock. The returns which will be generated are compared relatively to other stocks of similar nature operating in the markets (Gitman, 2003). The major difference between both the absolute and relative return is that absolute return is concerned about the returns which are generated from one particular asset or stock, whereas in relative return the stock is compared or benchmarked with the measures of other stocks. The most debated concept of Security Analysis and Portfolio Management is about the understanding whether a portfolio has been properly analyzed for the returns which the investors will get or understanding the relative performance of that particular stock in the markets (Deloitte, 2010). The investors need to redefine the definition of risk, how it is measured and how to deal with it and for this reason; investors create a portfolio of different stocks and securities. Alpha and Beta are the tools used by the investors to assess their portfolios and measure whether or not their investments are generating the expected returns considering the risk they are taking. Assessing a portfolio in terms of both Alpha and Beta, the investor will have more control over the portfolio and he will maximize the returns by minimizing risk (Koba, 2012). The measurement of an investment on risk adjusted basis is called Alpha. Investors seek to minimize risk and increase returns (Loth, 2007). The stock prices are subject to volatility. The price risk associated to a portfolio determines the return expected by the investor. The additional return which an investor gets on a portfolio apart from the benchmark set is called Alpha. A negative Alpha of a portfolio shows underperformance (Faulkenberry, n.d.). Beta is a tool which is used to measure the volatility of risk associated to a portfolio as compared to the performance of the market. Regression analysis is used to calculate Beta. In other terms Beta is the propensity of investment return to respond to the market volatility. The lower the value of Beta, lesser will be the volatility of the stock with respect to the market. Both Alpha and Beta are popular tools used for the measurement of volatility. Alpha compares the asset returns on the investment to the risk adjusted expected returns whereas Beta is the movement of the asset along with the benchmark that has been set by the market. Alpha is very important for assessing the growth and the returns that are associated to the portfolio. It depends on the structure of the portfolio, the investor and the market which is being analyzed that which factor either the Beta or the Alpha will be critically significant for the investor (Seeking Alpha, 2011). With the varying school of thoughts the perceptions of the importance of Alpha or Beta vary. Alpha and Beta alone do not possess the potential to assess the risk instantly and adjust the portfolio for the returns. Alpha alone is not sufficient to assess the skills which are derived from the leverage of the portfolio. It is not suitable for a risk averse investor and may end up being a misleading performance measure for the investors. The value of Alpha itself is not sufficient for the assessment of the stock but it can be used if a benchmark of the portfolio is set. Beta does not possess this benefit. The direction of the market cannot be assessed by the benchmark Beta set for the portfolio. The use of Alpha and the speculations made by using it are very consistent. The ...Show more

Summary

Finance Assessment Name of the of the instructor Date SECTION A QUESTION # 1 PART # 1 SIGNIFICANCE OF ABSOLUTE RETURNS TO RELATIVE PERFORMANCE The term absolute return is linked to the utilization of assets by the company over a specific period of time…
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Finance Assessment essay example
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