Security Analysis and Portfolio Management Assignment - 1

Security Analysis and Portfolio caution - Assignment Example358). For the stock commercialize perspective, the domineering investment returns are gaining more fame lately delinquent to the start of mutual stocks aiming at absolute return objectives. In contrast, traditional mutual fund aims at producing smart relative investment returns as compared to the suitable benchmark. Absolute returns facilitate profitability in most periods and acts over an extensive range of market conditions. Beta measure reduces the risk of exposures during the determination of return and risk on stocks and portfolios. Use of beta coefficient in stock selection requires comparison with the market. The investor, therefore, construct the portfolio by potation the relationship between beta coefficient and the prevailing market prices. Betas carry with them tall risks, and markets with proscribe betas may give the fluctuations in market prices. Despite betas helping in stock selection, its effective ness assumes that movement in the market requires careful analysis of positive and negative directions. Also, beta approach assumes analysis of historical considerations for future prediction. As a result, when portfolio selection fails in accurate reading of the market movements, the resulting portfolio selection is incorrect. This method requires a high degree of precision. On the other hand, the alpha parameter indicates the return on security at postal code market return. Positive alpha indicates bonus return while negative alpha indicates an undesirable penalization to the investor (Carter & Howard 1990, p. 81-85). Absolute return investing pursues the returns independent of the traditional benchmark and is un restricted. This means that it uses the modern tools like the hedge strategies in reducing the investors risk. Absolute return acts as the modern strategy that pursues the target returns with reduced volatility than relative performances. This enhances the diversificat ion of portfolios for all types of investors (Edwards & Alfons 2004, p. 143). Benchmark Indexes Investors establish a long term wealth in stocks due to historical tract record of their positive performance. Most traditional mutual bullion constrain the manager to invest in domestic markets. However, the absolute return strategies are less constrained. The objective of absolute return removes constraints on managers and allow for the implementation of more strategies to address the market volatility. For instance, the relative performance may allow for investment in all sectors, but have a high likelihood of put to work by benchmark index weightings of other sectors. This is because any divergent can result into risk. This compels the traditional funds take on a market exposure. On the other hand, the pursuit of absolute returns reduces the risks by managers when labour a full market exposure (Fornell 2006, p. 3). Traditional Benchmarks When compared to relative performances, abso lute returns are independent of the traditional benchmarks. The measurement of funds in absolute returns does not involve the market indexes. Rather, their measurement takes place aboard their return goals. This enhances the removal of constraints on investment managers. The absolute return does not involve any inducement of making the funds appear similar to securities index. This provides greater incentive to prevent risk caused by negative returns (Fornell 2006, p. 4). Inflation The absolute return objective focuses on the elementary concerns of an investor to help achieve a