Portfolio Strategy Assignment
Demetrie M. Howard
University of Phoenix
The organization I have chosen to plan a portfolio strategy for is O’Connor and Associates. This organization is my current employer and it will be a challenge to create one for them. The organization is a property tax firm, it assist clients with reducing the appraised value of their property, which in turn reduces the amount of property taxes due. The organization is diversifying; it is going into third party collections, judgment recovery, and mortgage loans. This firm has made substantial errors in the past therefore to understand the cause and effect of those ...view middle of the document...
O’Connor and Associates to achieve the goal of wealth maximization will use an active portfolio strategy. Under this strategy, managers will use available information and forecasting techniques to ensure better performance as compared to a portfolio that is simply classified. For example, active common stock strategies include forecasts of future earnings, dividends or price/earnings ratio (Fabozzi, 2002). Similarly, bond portfolio, which are actively managed, include forecast of future interest rates and sector spreads. Additionally, active portfolio strategy, which involves foreign securities, is required forecasts of local interest rates and exchange rates.
In regard to this strategy, people at top management level will make decisions that are necessary to maintain firm’s financial performance and to attain non-financial goals such as performing corporate social responsibilities effectively and create a solid brand image in the market. According to Smithson, Et. El. (1988), “To get a measure of the sensitivity of the value of the firm to changes in the financial prices, we must first define the basis for the measure. It can be a “flow” (or single-period) measure like the maturity gap analysis above or a “stock” (or multi-period capitalized percent value) measure such as duration” (p. 394).
Another major production cost, but a necessary cost, is insurance to protect against losses. According to Doherty, et el. (1977), “…insurance purchases can increase shareholder value by:
• Avoiding underinvestment and other problems faced by companies whose financial solvency (or even just liquidity) could be threatened by unlimited losses:
• Transferring risk from non-owner corporate stakeholders—managers, employees, suppliers—at a disadvantage in risk-bearing;
• Providing efficiencies in loss assessment, prevention, and claims processing;
• Reducing taxes; and
• Satisfying regulatory requirements” (p. 477).
In addition internal controls are a necessary tool to ensure or to assist with failure prevention. According to Jensen (1995), “With the shutdown of the capital markets as an effective mechanism for motivating change, exit, and renewal, we are left to depend on the internal control system to act to preserve organizational assets, both human and otherwise. Throughout corporate America, the problems that motivated much of the control activity of the 1980s are now reflected in lackluster performance, financial distress, and pressures for restructuring” (p. 522).
After classifying a suitable portfolio strategy, next step is to choose the specific financial instrument to be included in the portfolio. Financial instruments are known as “securities”. The development of an efficient portfolio requires an evaluation of each security. An efficient portfolio will provide the greatest expected return for a given level of risk to O’Connor and Associates.
The development of an active portfolio begins...