Answer the 5 questions of investment portfolio management Essay

Answer the 5 questions of investment portfolio management - Essay ExamplePresent honour of Dividends employs the address of equity as the discount figure. Operating plain cash flow is the cash residue subsequently eliminating direct costs, working capital and capital expenditure needed for future growth, but before whatever payments to suppliers of capital. The libertines weighted average cost of capital (WACC) is the discount rate employed in determining operating free cash flow. Free cash flow to equity refers to operating free cash flow less payment to debt holders (Strong, 2008). The firms cost of equity is used as the discount rate. Present value of Cash flow allows a degree of flexibility for changes in gross sales and expenses, which implies varying rates of growth over time. However, present value of cashflow valuation approach path has a failing in that it is heavily dependent on growth rates of cash flows and the discount rate estimates. carnal knowledge valuation approach to security valuation offers information on how the grocery is presently valuing the stock. Components timed victimization the relative valuation technique include the price earning ratio, price to sales ratio, price to book value and the price to cash flow. Unlike the present value of security valuation, relative valuation approach does not offer insights as to whether current valuations be appropriate. Thus, valuations could be too low or high at a certain point in time. As such, Relative valuation is suitable when there ar comparable firms in terms of the risk, industry and size in the market. It is overly appropriate when the aggregate market and the entitys industry ar not under valuation extreme. That is to mean that the collective market and the firms industry should not be acutely overvalued or undervalued (Strong, 2008). Both cash flow approach and relative valuation approach have several factors in common. One is that they are both alter by the investors r equired return on the stock since this return rate becomes a large element of the discount rate. Secondly, the two valuation approaches are affected by the growth rate mind employed in the valuation technique such as dividends, sales or earnings. Therefore, the two approaches whitethorn be considered as complementary. 2. The concepts of systematic and unsystematic risk, variance, covariance, standard deviation and beta as each of these bushel to investment management. disorganised risks refer to the kind of uncertainty that is associated with the industry in which a company operates. Unsystematic risks are also referred to as specific risks or diversifiable risks for they are specific in each industry, and they are reduced through diversification. Unsystematic risks arise as a result of factors particular to an industry or the firm such product category, marketing, research and development and pricing. Systematic risks refer to the kind of uncertainty that is entire in the whol e market segment. They are also referred to as market risks or non-diversifiable risks because they are infixed in the entire market and diversification do not result in their reduction. Systematic risks are such as war, inflation, change in taxation, global security perils and political instability that affect the carrying into action of firms in all industries. Total risk is a combination of systematic and unsystematic risks. Variance is the measure of volatility from the mean. Variance helps an investor to establish the risk involved in purchasing a certain security. A higher variance indicates greater variability and thus greater risk. A greater variance also