Investment Strategies Order Number Essay Example for Free

Investment St driftgies Order Number EssayThere are many another(prenominal) methods an investor can use to determine if a stock is a good buy or not. Three indicators often used to assess the risk of a security are beta, alpha and the Sharpe ratio. One of the most popular measures of risk associated with a security is its beta. Beta is a measure of a stocks volatility in relation to the market as a whole. The market is given a beta of 1. 0 and individual stocks are ranked harmonise to how much they deviate from the markets beta. Stocks with a beta of less than 1. 0 are considered less volatile than the market and, therefore, pose less risk.Stocks that ease up betas higher than 1. 0 are considered more volatile than the market and, therefore, pose more risk. All things being equal, an investor would expect to see higher generates on a stock with a beta higher than the market than one with a beta lower than the market. (1) Beta is also a key component for the outstanding a sset pricing model (CAPM). The original CAPM defined risk in terms of volatility, as measured by a stocks beta coefficient. The formula is Kc = Rf + beta Km Rf) where Kc is the risk-adjusted discount rate (also known as the cost of capital)Rf is the rate of a risk free investment, i. e. ten-year treasury bill Km is the return rate of a market benchmark, such as the SP 500 Kc is the expected rate of return you would require before you would be interested in a grouchy stock at a particular price. The CAPM expresses the amount of risk a particular stock has and gives an investor an idea of the expected returns he should expect given a certain direct of risk. The more risky a stock is the higher the level of returns an investor would expect for that particular stock. (2)A stocks alpha is a mathematical estimate of the amount of return expected from a stocks inherent values, such as the rate of growth of in earnings per share, management strengths or other factors, as opposed to gener al market conditions. Stocks with an alpha greater than 1. 0 can be expected to outperform the market regardless of what happens to the market as a whole. (3) The Sharpe ratio helps investors determine the best executable proportion of securities to use in a portfolio that can also include cash. The formula for the Sharpe ratio is S(x) = (Rx Rf) / StdDev(x) where x is some investmentRx is the average annual rate of return of x Rf is the best possible rate of return of a risk free security (i. e. cash) StdDev is the standard deviation of Rx The Sharpe ratio is a direct measure of reward-to-risk. In other words, the Sharpe ratio is used to characterize how well the return of an asset compensates the investor for the risk taken. (4) Although beta, alpha and the Sharpe ratio are effectual for an investor to gauge the risk of a security or portfolio of securities there are also other methods an investor can use to determine whether a security is a good investment or not.The devil mos t common methods used to determine the investment potential of a security are underlying analytic thinking and technical abridgment. Fundamental abridgment is the process of looking at a craft from its financial statements. This type of analysis typically looks at various ratios of the business to determine its financial health. The goal of fundamental analysis is determine the contemporary worth of a stock and how the market values the stock. (5) Probably the most two important factors looked at in fundamental analysis are a companys earnings and revenue growth.Investors like to see earnings and revenue increasing by at least 25% for each of the last three quarters and year-to-date. Return on equity (ROE) is also a major(ip) fundamental factor. ROE reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. (6) The higher a companys ROE compared to its industry the better. Investors typically look for an ROE of at least 17%. Technical analysis is a method of evaluating stocks by relying on the assumption that market data, such as charts of price, volume and open interest can help predict afterlife market trends.(7) Investors using technical analysis typically look for trends in chart data and use a variety of technical indicators, such as move averages, Bollinger bands, fast and slow stochastics, MACD, and RSI to determine the right buy point for a stock. More sophisticated investors use a combination of fundamental analysis and technical analysis to determine whether a stock is a good buy or not. They use fundamental analysis to make sure a company is healthy from a financial standpoint and is a leader in its industry.Once determining a stock is healthy from a fundamental standpoint, these investors will use technical analysis to determine the correct buy point for a stock. A stocks chart will build the investor how the stock is actually performing in the market and whether it is risi ng out of a good base or is overbought based on how far its current price is from its 50 day moving average. If a stocks price is 30% or more above its 50 day moving average, the risk that it will fall into a correction is greater. References (1) http//www. investopedia. com/articles/stocks/04/113004.asp Beta Know the Risk (2) http//www. moneychimp. com/articles/valuation/capm. htm CAPM Calculator (3) http//www. allbusiness. com/glossaries/alpha/4943389-1. html Business interpretation for Alpha (4) http//www. moneychimp. com/articles/risk/sharpe_ratio. htm The Sharpe Ratio (5) http//stocks. about. com/od/evaluatingstocks/a/Fundanatools1. htm Tools of Fundamental summary (6) http//beginnersinvest. about. com/cs/investinglessons/l/blreturnequity. htm Return on Equity (ROE) (7) http//www. investorwords. com/4925/technical_analysis. html Technical Analysis