Investment Strategy and Portfolio Management

Topics: Investment, Mutual fund, Modern portfolio theory Pages: 9 (2397 words) Published: April 7, 2012

Investment Strategy and Portfolio Management - Case of study: Kaplan Capital


For organisations operating in unpredictable and competitive markets, it becomes a challenge for fund managers to create an optimal investment portfolio for their companies and their clients. Fund managers are presented with various prospects in emerging markets, equities, real estate, corporate bonds, government bonds, hedge funds, financial derivatives, and other alternative investments options. With such a diverse investment market, it becomes increasingly complicated for fund managers and other investors to shape, manage and monitor investment portfolios. This report presents a discussion on the future strategic asset allocations which Kaplan should employ in making its investments in order to ensure high levels of profitability in the company.

Harry M. Markowitz, a University of Chicago economist, developed the portfolio theory in 1927 (Markowitz 1952). Portfolio theory is an investment technique that enables investors to make suitable estimates of both the anticipated risks and returns, as evaluated statistically, for their investment portfolios. Harry identified how investors can combine different investment assets into an efficiently diversified portfolio. He argued that combining investment assets with different price movements – negatively correlated assets; would reduce the expected risk of a portfolio and improve the expected rate of return of from the portfolio. He described how to best design a diversified portfolio and confirmed that such a portfolio was expected to perform well.

Analysis of the Current Issues in the Investment Environment

The recent disruptions in financial and money markets have triggered fear and anxiety among many investors. Globally, share markets have been falling sharply, considerably affecting portfolios and confidence of investors internationally. Therefore, before we settle on any investment strategy there are a number of factors we will need to consider and evaluate critically, before designing our optimal investment strategy.

The other current issue in the economic environment is the issue of investors losing confidence in assets investments and fund investments, opting to withdraw their investment for fear of making more losses in future. Investors lose confidence in the market consequently resulting in a credit crunch.

Alternatives for Credible Strategic Asset Allocation

Here we attempt to deal with the turmoil in the market and how to work through with these stringent conditions to ensure we avert our losses and ensure we get positive results. Companies have not ceased to do well simply because the markets are down. All that is needed is the right approach to reassure investors of growth and reasonable investment decisions to ensure the business does not plunge into huge losses as a result of the current turmoil in international financial markets. Basically, asset allocation is a structured and efficient method of diversification.

The most sensible way to get through a difficult period without incurring huge losses is to stay well diversified. In our case, we can implement a number of strategies to help us manage our investment portfolios. One credible alternative is to stay diversified; for a well diversified portfolio with negatively correlated assets can adequately withstand turbulent economic times, since not all assets or markets are affected in the same magnitude by economic crises (Mark Grinblatt 1995). Maintaining a diverse range of investments implies that bad returns from one or a few assets will in fact have a mild effect on the portfolio.

At times, some good investments emerge during turbulent economic times, thus, presenting an opportunity to uncover profitable prospects. Due to the panic by most investors, they tend to dispose of investment assets, which if given time would recover and earn them better returns....
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