Question

A. How might an issue (negative or positive) within the overall stock market impact the company’s stock valuation numbers, other financial variables, or its overall portfolio management? Be sure your response is supported by evidence.

B. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on the company’s financial position. Be sure to justify your reasoning.

Answer 1

A. How might an issue (negative or positive) within the overall stock market impact the company’s stock valuation numbers, other financial variables, or its overall portfolio management? Be sure your response is supported by evidence.

Portfolio management is the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, a company, or an institution.

Portfolio management requires the ability to weigh strengths and weaknesses, opportunities and threats across the full spectrum of investments. The choices involve trade-offs, from debt versus equity to domestic versus international and growth versus safety.

Professional licensed portfolio managers work on behalf of clients, while individuals may choose to build and manage their own portfolios. In either case, the portfolio manager's ultimate goal is to maximize the investments' expected return within an appropriate level of risk exposure.

Portfolio management may be either passive or active in nature.

• Passive management is a set-it-and-forget-it long-term strategy. It may involve investing in one or more exchange-traded (ETF) index funds. This is commonly referred to as indexing or index investing. Those who build Indexed portfolios may use modern portfolio theory (MPT) to help optimize the mix.
• Active management involves attempting to beat the performance of an index by actively buying and selling individual stocks and other assets. Closed-end funds are generally actively managed. Active managers may use any of a wide range of quantitative or qualitative models to aid in their evaluations of potential investments.

Key Elements of Portfolio Management

Asset Allocation

The key to effective portfolio management is the long-term mix of assets. Generally, that means stocks, bonds, and "cash" such as certificates of deposit. There are others, often referred to as alternative investments, such as real estate, commodities, and derivatives.

Asset allocation is based on the understanding that different types of assets do not move in concert, and some are more volatile than others. A mix of assets provides balance and protects against risk.

Investors with a more aggressive profile weight their portfolios toward more volatile investments such as growth stocks. Investors with a conservative profile weight their portfolios toward stabler investments such as bonds and blue-chip stocks.

Diversification

The only certainty in investing is that it is impossible to consistently predict winners and losers. The prudent approach is to create a basket of investments that provides broad exposure within an asset class.

Diversification is spreading risk and reward within an asset class. Because it is difficult to know which subset of an asset class or sector is likely to outperform another, diversification seeks to capture the returns of all of the sectors over time while reducing volatility at any given time.

Real diversification is made across various classes of securities, sectors of the economy, and geographical regions.

Rebalancing

Rebalancing is used to return a portfolio to its original target allocation at regular intervals, usually annually. This is done to reinstate the original asset mix when the movements of the markets force it out of kilter.

For example, a portfolio that starts out with a 70% equity and 30% fixed-income allocation could, after an extended market rally, shift to an 80/20 allocation. The investor has made a good profit, but the portfolio now has more risk than the investor can tolerate.

Rebalancing generally involves selling high-priced securities and putting that money to work in lower-priced and out-of-favor securities.

The annual exercise of rebalancing allows the investor to capture gains and expand the opportunity for growth in high potential sectors while keeping the portfolio aligned with the original risk/return profile.

Active Portfolio Management

Investors who implement an active management approach use fund managers or brokers to buy and sell stocks in an attempt to outperform a specific index, such as the Standard & Poor's 500 Index or the Russell 1000 Index.

An actively managed investment fund has an individual portfolio manager, co-managers, or a team of managers actively making investment decisions for the fund. The success of an actively managed fund depends on a combination of in-depth research, market forecasting, and the expertise of the portfolio manager or management team.

Portfolio managers engaged in active investing pay close attention to market trends, shifts in the economy, changes to the political landscape, and news that affects companies. This data is used to time the purchase or sale of investments in an effort to take advantage of irregularities. Active managers claim that these processes will boost the potential for returns higher than those achieved by simply mimicking the holdings on a particular index.

Trying to beat the market inevitably involves additional market risk. Indexing eliminates this particular risk, as there is no possibility of human error in terms of stock selection. Index funds are also traded less frequently, which means that they incur lower expense ratios and are more tax-efficient than actively managed funds.

Passive Portfolio Management

Passive portfolio management, also referred to as index fund management, aims to duplicate the return of a particular market index or benchmark. Managers buy the same stocks that are listed on the index, using the same weighting that they represent in the index.

A passive strategy portfolio can be structured as an exchange-traded fund (ETF), a mutual fund, or a unit investment trust. Index funds are branded as passively managed because each has a portfolio manager whose job is to replicate the index rather than select the assets purchased or sold.

The management fees assessed on passive portfolios or funds are typically far lower than active management strategies.

B. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on the company’s financial position. Be sure to justify your reasoning.

External environment of a business consists of all those external factors that are operating outside the premises of the organization. However, they impose a significant influence over the operations, survival and growth of the company. Businesses have very little or most often no control over the environment in which it is operating which arises the need to continuously conduct environmental analysis as well as adapt to external changes which serve to be a reactive or proactive response and leads towards a significantly different outcome. External environment factors can significantly affect business operations and effectiveness to a great extent.

Micro environment – Environmental factors that can either be controlled or influenced by the organization are termed as micro environmental factors which include employees, customers, competitors and media.

Macro environment – There are several macro economic factors are also present that can influence businesses and their operations. These factors allow assessing the external environment along with evaluating any potential changes. These factors are usually non-controllable factors. However, they have a huge impact over organizations if not considered closely.

n order to become successful, businesses should assess the market environment that exerts an impact on the development of the organization. After evaluating the external business environment factors, companies can draft suitable strategies that will be helpful in handling a specific situation. These impacts are out of control of the company and require evaluation and timely response to the external environment of a buseinss.

Laws

Rules and regulations of a country have a very strong impact over a business. Many countries devise rules and laws that hinder the development of certain industries whereas, there are some countries where there are laws which serve to be a positive sign of the continuous support from the government. Evaluating laws, rules and regulations are important to make decisions that will be beneficial for the company.

Economic situation

Economy of a country is considered to be the most impacting factor for the success of an organization. Within the economy, there are several contributing factors like economic crisis, fluctuation in interest rates and other similar aspects that will have direct and strong impact over the consumption behavior of the buyers and ultimately over the profits of the business.

Infrastructure

n order to develop exponentially, considering the infrastructure of the country is also very important. If the road to the company is not good, this will be a restriction for the company. Delivery methods will face difficulty and will pose a big challenge for the organization.

Example of Market External Factors that affect Business

Below are some examples of external factors that may affect businesses growth, profit share and even customer base if not responded.

Coca Cola and Indian political environment – Coca Cola is the most popular and the world’s largest beverage company. The company operates in different countries over the world and hence renders political aspects to be the most influencing external factor. When Coca Cola started its operations in India, it was greatly affected by the political environment of the country. Corruption and pressure from various political parties led the company to face a downward sloping profit curve. Coca Cola soon revised its operating policies and entered into the Indian market again after fulfilling all political factors.

Apple facing a Lawsuit in U.S. Courts – In December 2017, Apple facing lawsuits filed in different U.S. District Courts in New York, California and Illinois after Apple admitted that they slow down older IPhones to protect their ageing batteries performance. This situation can affect their market share and profit. It is up to Apple how they respond to external issue.

Airbnb facing Ethical and Legal Issues – Airbnb is an online short term lodging service, let people to rent out their rooms, apartments and homes to visitors. In many cities of the world it is facing lawsuits, fines, ehtical and legal issues due to not comply with local laws. Many housing activists and city authorities are saying it is disrupting neighborhood and communiteis. The company should conduct deeper analysis of their busienss model to address the legal factors affecting their business. Learn about Airbnb Pestle Analysis.