Security Analysis and Portfolio Management Assignment - 1

Security Analysis and Portfolio Management - Assignment Example 358). For the stock market perspective, the absolute investment returns are gaining more fame lately due to the start of mutual funds 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 risks 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 drawing the relationship between beta coefficient and the prevailing market prices. Betas carry with them high risks, and markets with negative betas may withstand the fluctuations in market prices. Despite betas helping in stock selection, its effectiveness assumes that movement in the market requires careful analysis of positive and negative direct ions. 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 zero market return. Positive alpha indicates bonus return while negative alpha indicates an undesirable penalty to the investor (Carter & Howard 1990, p. 81-85). Absolute return investing pursues the returns independent of the traditional benchmark and is unconstrained. This means that it uses the modern tools like the hedging 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 diversification of portfolios for all types of investors (Edwards & Alfons 2004, p. 143). Benchmark Indexes Investo rs establish a long term wealth in stocks due to historical tract record of their positive performance. Most traditional mutual funds 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 influence 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 undertaking a full market exposure (Fornell 2006, p. 3). Traditional Benchmarks When compared to relative performances, absolute 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 alongside their return goals. This enhances the removal of constraints on investment managers. The absolute return does not involve any incentive 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