Dynamic Asset Allocation Financial Markets †MyAssignmenthelp

Question: Discuss about the Dynamic Asset Allocation for Financial Markets. Answer: Introduction: The concept of maximization of shareholders wealth is that it focuses on enhancing the overall value of business instead of focusing on short-terms benefits or returns. On other hand, concept of maximization of profit is essentially a short-term approach that does not lead to increased value of business. The main objective of maximizing the wealth of shareholders is that it results in efficiently allocating capital and maximizing the return on capital. The concept is related with increasing the shareholders wealth by increasing the business value (Bae et al., 2014). Maximizing the wealth of shareholders is one of the universally accepted objectives of any organization. The concept of maximizing the wealth of shareholders came into being after the concept of profit maximization. Value of shareholders would improve with the increase in price of shares that is regarded as the net worth business function. The drawbacks of maximization of profit model are obviated by the employment of model of wealth maximization. Capital investments made by organization should be able to generate return that is more than the required rates of return such investments made such that this would lead to maximizing the wealth of shareholders. However, an increase in profit of organization indirectly increases the wealth of shareholders. This is so because this would generate higher dividend payment to shareholders that would involve long-term pay offs to customers. Maximization of wealth of shareholders is the responsibility of management by allocating resources in way that would help in generating highest returns and at the same time mitigating the risks. A detailed and in depth analysis if cash flow associated with investments is required to be conducted by management. Risk aversing investors are one when they are face with two investment decisions, they would prefer the investments with lower risks. Their portfolio comprise of assets that does not carry any risks and generates a fixed income. Such types of investors prefer making investments in government bonds, treasury bills, fixed deposits and certificate of deposits that generates lower rate of return. However, they often lose out on higher return by not making investments in capital assets that has the opportunity of providing investors with higher return. They often lag behind investing in right investment vehicle and are not able to participate in the market (Deguest et al., 2013). Making an investment in lower return and risk free assets deprive them of advantage that is generated from growth of market and higher level of profits. The establishment of relationship volatility and high level of profits is difficult for such investors. Making investments in risky assets would provide long-term benefits to investor seeking investment in such assets. Expected returns for investors are lower for investors who are willing to take additional risks on their investments. There always exists trade off between risk and returns generated by investments. Investment with lower risk generates lower return and investments with higher risks generate higher returns. Apprehension of investors investing in risky assets is mainly because of the fall in stock value in market. Tax advantage is the main benefits of making investment in capital market assets (Harlow Brown, 2016). It is essential for corporate managers to make optimum allocation between risky assets and risk free assets. Some additional costs are involved in making investments in long-term assets and strategies that should be adopted by organization is incorporating the level of tolerable risks and generates desirable level of returns. However, it can be said that investments in risky asset leads to increased business risks and therefore, corporate managers should not always undertake investments in risk free assets. CBA Rio Tinto All Ordinary Index Date Stock Price Holding Period Return Stock Price Holding Period Return Stock Price Holding Period Return 1/31/2016 59.99 40.28 4947.90 2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12% 3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19% 4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48% 5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52% 6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28% 7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03% 8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08% 9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22% 10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85% 11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94% 12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77% CBA Rio Tinto All Ordinary Index Date Stock Price Holding Period Return Stock Price Holding Period Return Stock Price Holding Period Return 1/31/2016 59.99 40.28 4947.90 2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12% 3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19% 4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48% 5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52% 6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28% 7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03% 8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08% 9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22% 10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85% 11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94% 12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77% Average Monthly Holding Period Return 2.27% 5.02% 1.29% CBA Rio Tinto All Ordinary Index Date Stock Price Holding Period Return Stock Price Holding Period Return Stock Price Holding Period Return 1/31/2016 59.99 40.28 4947.90 2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12% 3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19% 4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48% 5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52% 6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28% 7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03% 8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08% 9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22% 10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85% 11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94% 12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77% Annual Holding Period Return 1.96% 4.29% 1.15% CBA Rio Tinto All Ordinary Index Date Stock Price Holding Period Return Stock Price Holding Period Return Stock Price Holding Period Return 1/31/2016 59.99 40.28 4947.90 2/29/2016 66.61 11.04% 42.69 5.98% 5151.80 4.12% 3/31/2016 65.70 -1.37% 51.55 20.75% 5316.00 3.19% 4/30/2016 68.84 4.79% 44.69 -13.31% 5447.80 2.48% 5/31/2016 66.12 -3.95% 45.50 1.81% 5310.40 -2.52% 6/30/2016 68.77 4.01% 49.56 8.92% 5644.00 6.28% 7/31/2016 63.85 -7.16% 47.60 -3.95% 5529.40 -2.03% 8/31/2016 67.17 5.21% 51.61 8.42% 5525.20 -0.08% 9/30/2016 68.09 1.37% 54.18 4.98% 5402.40 -2.22% 10/31/2016 72.97 7.17% 57.75 6.59% 5502.40 1.85% 11/30/2016 76.46 4.78% 59.90 3.72% 5719.10 3.94% 12/31/2016 75.77 -0.91% 66.68 11.32% 5675.00 -0.77% Standard Deviation 5.26% 8.64% 2.99% CBA Rio Tinto Date Stock Price Holding Period Return Stock Price Holding Period Return Beta 1.1 0.95 Expected Returns 7.38% 6.81% Weightage 60% 40% Portfolio Return 7.15% Portfolio Beta 1.04 Reference: Bae, G. I., Kim, W. C., Mulvey, J. M. (2014). Dynamic asset allocation for varied financial markets under regime switching framework.European Journal of Operational Research,234(2), 450-458. Deguest, R., Martellini, L., Meucci, A. (2013). Risk parity and beyond-from asset allocation to risk allocation decisions. Harlow, W. V., Brown, K. C. (2016). Market Risk, Mortality Risk, and Sustainable Retirement Asset Allocation: A Downside Risk Perspective.Journal of Investment Management,14(2), 5-32.