Meeting Investment Prerequisites
The decision to invest this money will be based on a carefully planned framework to provide concepts, tools, and techniques necessary to achieve financial and investment goals. The investor will clearly define and meet the investment prerequisites needed to take care of the basics of life such as mortgage, food, transportation, taxes, clothing, and emergencies.
Establishing Investment Goals
Long-term investment lies is crucial in ensuring stability in sunset years. Everyone expects to retire. This requires long-term planning that should ideally begin from the moment one graduates from college and joins the workforce. Finding the right mix of long-term investment program for a specific situation is paramount. Normally, investors at an early age have a higher ratio of risky to conservative investments. This ratio reduces as the percentage of conservative and income generating investments when a person gets older increase. This helps a person to reap higher returns on investment in youthful years because of; presumably, it makes more sense in taking investment risks.
Adopting an Investment Plan
The investor will invest in stocks of technology related companies. In recent years, the global downturn has presented a situation where investing in stocks would have been dangerous. The economic crises witnessed in United States and Europe was a pointer for any investor to be careful with long-term stocks. However, governments and world trade organizations are making efforts to ensure a stable global economy. Hence, stocks are a viable investment.
Evaluating Investment Vehicles
Dell Stock
Dell is an integrated technology solutions company situated in Texas, United States. However, it has a worldwide presence in the technology world. It develops, designs, and sells all manner of computer hardware and software. This includes desktops, tablets, laptops, anti-virus, and workstations. It is the third best seller of computers after HP and Lenovo. Michael Dell started the company in 1984. It employs over 120, 000 people directly with other indirect affiliations. It has recently acquired a number of other smaller companies such as Perot Systems and Alienware. This has solidified its place in the market, enabling it to have a pole position in the trade and manufacture of computers. Some of the company’s strong points include a well-organized Supply Chain Management and a huge online presence.
Its customers are spread across the globe. This is because of its pricing and product development strategy that allows users to purchase their products easily and cheaply. This is also attributable to the strong Supply Chain Management mentioned above. It has won a number of innovation awards and brags of being listed in the exclusive Fortune 500 list. The major competitors for Dell include Lenovo, Microsoft, HP, IBM, and Samsung among others.
Lenovo Stock
Lenovo PLC is a Personal Computer and technology company based in China. The company came to the limelight after the merger of IBM Personal Computer Division with Legend Holdings, which had been in operation since 1984. The company changed its name from Legend Holdings to Lenovo as part of a global strategic move aimed at expanding the business in 2004. Currently, the company occupies the top spot as the fastest growing in the PC market globally for the third year in a row.
Selecting Suitable Investments
As part of a long-term investment, it is worth investing in Dell. Although it has one of the most volatile stocks in the NASDAQ (as shown in the calculations), it presents huge growth opportunities. The volatility is attributable to the dynamic nature of the technology world. However, it is crucial to note that less than 40% of the world population currently accesses the products and services that Dell seeks to offer in future and offers currently.
This paper is an in-depth analysis of the stock of Dell with the aim of coming up with a 10 year investment plan in the company. The paper also compares the company with other possible investment areas in the technology world such as IBM, HP, and Apple Inc. The following indicates the level of return of Dell stock and therefore the expected amount after a 5-month period is discernible.
Dell Stock Analysis
The following are some of the most important measures that determine the viability of an investment in a particular stock. They include risk measures (Beta) and the measure that compares a Dell stock with the market (standard deviation). The average return indicates the level of return the stock is expected to register and the co efficient of variation measures risk. A cursory comparison of these figures with the figures in the Portfolio Table below, which has these measures, indicates that Dell performs better in comparison to all the technology companies listed. Therefore, it is a worthwhile investment.
Constructing a Diversified Portfolio
From the portfolio, the nature of business the investor should focus on is quite evident. The Beta ratios are all above one. This indicates a highly volatile market characteristic of the technology world. This is because of the ever-changing nature of the industry. Companies record high prices over a short time, which culminates in comparatively new and trendy products. However, the technology market remains quite open with massive investment opportunities. However, when a stock responds rapidly to market changes it shows how well management can notice opportunities. Hence, investment may be directed towards growing shareholder value. Additionally, this volatility is crucial since it helps management to identify potential pitfalls in investment decisions.
From the above portfolio, it is true to see that Dell is the riskiest asset for long-term investment. However, it is the best for a 5-month period investment with high return expected. From the investment of AED 300000, the investor expects a 34.17% return. Hence, the final figure is expected to be around AED 402510.
Managing the Portfolio
Separability Theorem
According to Separability Theorem, all investors, regardless of their attitude towards risk, should hold the same risk assets in their portfolios, as shown below
Capital Market Line (CML). The crucial differences in portfolios held by investors of different psychologies are in the in-between the risky stocks and the non-risk stocks. Different investors will choose different points on the capital market line. In the above figure, point M represents the market portfolio and Rf is the rate of return on the riskless asset. All investors combine Rf and M, but in different proportions. The market portfolio is the ‘same mix of risky stocks’. Investor A for example prefers to play safe with emphasis on riskless assets. Person B has most funds in the market portfolio. Person C could have had leveraged portfolios that were added to his original funds by borrowing at Rf and putting all of them into the market portfolio.
The interior decorator school of thought suggest that different portfolio of risky assets should be prepared for differing investors to suit their tastes. In other words, points other than M on the all risky portfolio should be taken. This will clearly lead to inefficiencies in the presence of riskless asset if all the assumptions of CAPM hold. If the assumptions do not hold, in particular the borrowing assumption, then the Separability Theorem falls. Separability Theorem therefore maintains that investors borrow money to invest.
Security Market Line
The Capital Asset Pricing Model defines the probable relationship between risk and the required rate of return on assets when they are in portfolios that have a mixture of investments. It assumes that investors are rational and they choose among alternative portfolios based on each portfolio’s expected return and standard deviation. Furthermore, the model assumes that investors are risk averse and maximize the utility of end of period wealth. Additionally, such investors have similar expectations about the returns an asset will register. In this case, all assets are marketable and divisible. In other words, it is believed under this model that the capital market is efficient and perfect.
All assets that are priced correctly will lie on the security market line. Any security off this line will either be overpriced or underpriced. The security market line therefore shows the pricing of all assets if the market is at equilibrium. It is a measure of the required rate of return if the investor were to undertake a certain amount of risk. The investor therefore has the option of reducing her risk of exposure by going for the less risky assets such as treasury bills and bonds in order to reduce this risk. The above diagram indicates that as long as you need additional returns, there is an additional risk that is associated with it.
The investor can decide to take calculated risk by just investing along the security market line. Any portfolio or asset on the security market line is less risky and worthy. Treasury bills and bonds are considered less risky since they have a fixed rate of return and a fixed period of investment and every investor is assured of this return. The risk-averse investors mostly undertake this kind of investment.
Appendix
Indices
- AAPL is Apple Inc.
- HPQ Hewlett Packard Co.
- LHL.F Lenovo Group Frankfurt.
- SGI Silicon Graphics Itnl Corp.
- SMCI Super Micro Computer Inc.
- CCUR Concurrent Computer Corp.
- CRAY Cray Inc.
- IBM International Business Machines.
- NICE Nice Systems Ltd.
- OMCL Omnicell Inc.