Introduction
Investment and return are the two flip sides of the same coin. There are certain pre-requisites that are essential for the investment purpose, and it would be used on the basis of analysis. There is tradeoff finds among the risk and return approach of an investment, and the most effective investor is the one who has the ability to manage the investment in a well organized and perfect manner (Davies and Servigny, p.34). Making of portfolio and diversification is one of the most important aspects from the viewpoint of investment purpose, and investors are delivering their best to maintain their portfolio. The most definite advantage that attained by the investors is minimizing their financial risk in an effective manner (Fabozzi, Peterson Drake and Habegger, p.90).
Regarding the diversification then it is supposed as the most important and widely used investment strategies used for minimizing and diversifying the risk. It base upon the stance of not putting all the eggs in a single basket. Rotation is an alternative name of diversification used by the investors before physically parking their money in the stocks of a company. Taking the right decision of investment at the right time and for the right industry is always been a challenge for an investor, because there are certain external factors that influence over the stance of decisions making in particular. Sam Stovall, the Chief Investment Strategist for Standard & Poor (S&P) had published the book that was specifically emphasizing on the stance of investment at the right time, and in the right direction.
The main mission of this assignment is to select different industries and then initiate an investment strategy. There are two parts of the assignment that needed to be complete accordingly.
Analytical Framework
Taking the right decision at the right time for the investment purpose is more than essential. For this assignment, there are nine (9) different companies which have been selected for the same. The names of the industries are
- Materials
- Energy
- Financials
- Industrials
- Technology
- Consumer Staples
- Utilities
- Health Care
- Consumer Discretionary
The average returns of these industries are as follows
The riskiness factor associated with the each of the industry’s return are as follows, which have been computed through standard deviation and variances
The proportion of every industry in the final portfolio is as follows
The ranking of the industry in simple cycles and recession cycles are mentioned below
In Normal Condition, Energy industry is the most effective industry for the investment followed by Material and Consumer Discretionary in the United States, while in economic recessions or changing in Business cycle Technology and Industrial industries are the most effective ones placed specifically on the position of 1st and 2nd respectively.
Part-2
This is the second part of the assignment that comprises on the report writing on the investment. There are certain parts that needed to be complete here to complete the stuff in an effective manner.
All of the industries are essential and effective. All of these industries are growing with effectiveness in this particular industry in the United States (US). From this particular analysis, it is found that Energy Industry is the most effective industry from all of these nine industries that did a perfect job in maintaining its return. The mean return of Energy Sector is 0.010%, while Material is the second highest among them. Industrial and Consumer Discretionary are some of the major industries that in which the return are high too. The average returns in these industries are 6% each, followed by Utility and Health Care Industry with a return of 5% each. Apparently, it is found that investment in any sector out of these 9 industries would be effective, and it will be essential for the investors to get the things in the right manner. Investment purpose is essential, and the investors would get the appreciation in their initial invested amount. The amount of riskiness can be a distinguishing factor among the investment purpose. Only those investment would be surrender and opted in which the margin of error and risk would be on a lower level. From this analysis, it is found that the riskiness associated with the project is 0.076%, while material, energy and financials have somewhat the same risk in particular. Consumer Staples has the lowest amount of riskiness in its stocks and return which is 0.0356%. It means that all of these industries worked wonderfully well to attract the investment of the investors, however it should be analyzed that which industries worked wonderfully well during the period of the current economic crisis.
According to the definition of London School of Business and Finance (LSBF), the term economic crisis associated with a time, when an economy starting to lose a large part of their assets, and become insolvent (Hagin, p.78). The current economic crisis was started in the financial year 2008 and 2009 that engulfed number of industries in its fatal claws and mouth. It was the same time when the rate of unemployment in the United States (US), and different parts of the world had increased heavily and posted a dramatic turnaround for the economy. The current economic crisis that termed as the worst after the Great Depression of World War II, because of its intensity and severity
It is required to analyze the effectiveness of each of the industry during the current economic crisis. There are nine industries which have been selected for the same analysis, and every industry has positive average mean return, however there are some industries that worked accordingly during the current economic crisis as well. It is called Business Cycle circulation, and there are three industries which performed wonderfully well during the financial period from 2008 to 2009. These industries are Financial, Industrial and Technology Industries. These are the three industries out of nine industries whose monthly return was in the positive term, but not very high, however it can be taken into account for the investment purpose in the industry. Financial and information technology industries are the most important and economically powerful industries of the world which are essential for the economic growth of an economy, and these are essential for the economic growth and effectiveness. If an investor is ready to park their investment in any of these nine industries, then it would be effective for them, because the average return of each of the industry is in positive, however the recommendations is to put most of the money in the Consumer Staples Industry, while the energy industry has the highest amount of return in particular (Litterman, p.89).
Introducing the Research Question
It is now obvious that investment is very essential and important for the sake of an organization, and no organization can attain effectiveness without having effective investment well being in their operations and financial aspects (Maheshwari, p.67). One of the major challenges that found in the field of investment is the association of risk with it, and most of the investors in the world are looking forward to decrease the amount of riskiness from their investment. Obviously, the most intuiting and effective method of decreasing the riskiness from the investment is diversify the portfolio accordingly. Diversifying means is to put the investment in different companies or in different industries as well. Diversifying is another name of rotation, and the research question that needed to be answer here is as follows
Why is the sector rotation question important to investors?
The answer is very simple, which is to bring economic prosperity with mitigating the expenses accordingly. Sector Rotation is a part of diversifying the investment purpose accordingly. Investors are more concerned with the risk instead of return, and rotating the sector and diversifying the investment through portfolio management is an important aspect as far as mitigating the systematic risk accordingly. In the aforementioned analysis, there are nine different industries have been opted, and each of the industry has a positive mean return with positive correlation with the market. It means an investor can get income appreciation by parking their money in the stocks of the company, however taking the right decision at the right time may spur their growth rate and can also decrease the rate of riskiness from the investment. As found from the above mentioned analysis that the industry which has the highest amount of mean return is Energy industry, but the industry which has the highest amount of variation in its stock price is Technological industry. It doesn’t mean that an industry with high return may come up with high riskiness as well. A perfect decision in terms of management of portfolio by allocating the proportion of the invested amount in each of the investment vehicle or industry would be effective for the investor. This particular allocation should be on the basis of the investor’s current investment strategy, and the level of risk which they want to absorb. Hence, sector rotation is important and effective for investor in terms of mitigating risk and increasing the yield of the investment.
Statistical test
There are certain statistical measures that can be taken into consideration for the same analysis, as these tests have the ability to conduct the things in an effective manner (Swensen, p.12). The names of these results are standard deviation, mean return, variation and correlation. Apart from that moving averages can also be taken into consideration for the analysis of the business cycle of these industries or to analyze their current situation in the economy of the country. With the help of these statistical tests, ranks have been given to each of the industry in terms of their investment power.
Research method
The method that used to examine the research is known as research methods. There are basically two important types of research methods known as Quantitative Research methods and Qualitative Research Methods, also known as Primary Research Method and Secondary Research Method. The research methods which have been used in this analysis is Secondary Research method in which all of the data of the industries have been accumulated through the officials websites of National Economic Research and Reuters. Relevant statistical tools and measures have been applied on the data to examine it accordingly. Monthly return of each of the industry has been taken into consideration for the analysis purpose, and it is found that it is giving authentic result for the analysis. The business cycle result can be found by analyzing the behavior of the stocks of the industries during the period from 2008 to 2009, as it was the same time in which the financial crunch had attacked on the economy of the United States.
Happening during economic change
There is a considerable change found among different economic time periods, as found in the current analysis. It is found that during the economic change, technology and industrial industries are the one that performed wonderfully well, as discussed in the aforementioned parts merely due to their effective management.
Summary/Conclusion
Work Cited
Davies, Greg, and Arnaud de Servigny. Behavioral Investment Management. New York: McGraw-Hill, 2012. Print.
Fabozzi, Frank J, Pamela Peterson Drake, and Wendy D Habegger. Financial Management And Analysis Workbook. New York: Wiley, 2004. Print.
Hagin, Robert. Investment Management. Hoboken, N.J.: Wiley, 2004. Print.
Litterman, Robert B. Modern Investment Management. Hoboken, N.J.: John Wiley, 2003. Print.
Maheshwari, Yogesh. Managerial Economics. New Delhi: Prentice-Hall of India, 2005. Print.
Swensen, David F. Pioneering Portfolio Management. New York: Free Press, 2000. Print.
