Free «Risk Adjustment» Essay Sample
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Most investors try to improve their recitals by having an easily adjustable schedule that will help them to be in a position to time the market (Dorfman, 1997).Market timing includes: having a change in different sectors. In case one is determined to prosper in his business, then he should be ready to change his stock and the acquaintances related to the stock he has. He should also be ready to amalgamate with different countries securities. The investors should also try to be in control of his stock and escape the probable risks (Hougel, 2005). A good way of managing to escape the uprising risks will be having a mechanism that will be flexible such that when the goods prices are low, you can switch to another commodity or purchase them from different distributors without much hustle. Correct timing will be determined by the lowering and hiking of the beta (b) in the markets of the high income consumers and lowering it in the markets where the risk free velocity is lower.
The P/E ratio
The Price earnings ratios are used to determine whether individual stocks are rationally priced. In case the P/E taken down today is high, the stock prices must be growing slowly for the past few months. According to a research done by some economists, this P/E mostly works well for the long term periods. In short term periods, the best method to determine the prices of the commodities would be to closely check how the earnings capitulate in reference to the assessment of the interest rates in the market. In cases when the results of the calculation are very low, the prices of commodities fall in the consequent weeks.
The stock valuation model
This tool is very effective since it does not offer predicted results rather it gives a gathered result of the value of the stock which helps the stock o be liquid even though it is in an in liquid investment or business(Imam, 2008). His model thus help most investors in determining whether to bring in a new stock or to retain to old one ( Demirakos, 2004) .
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Capital Asset Pricing Model
This is a model used to determine the rate of the non diversifiable risk of return for an asset which will be supplemented by a well analyzed market risk.
How to calculate the required returns while using the CAPM model
E(R) = Rf + ß( Rmarket - Rf )
The expected return of an asset is calculated by adding up the rate of the risk free interest to beta. The model is too theoretical thus becoming more difficult to use. He investors should be good market timers so as o avoid going at losses and being faced by tough risks.