Empirical Finance Coursework Essay Example | Topics and Well Written Essays - 1000 words

Empirical Finance Coursework - Essay Example These risks emerge due to the uncertainties associated with the future. Therefore, investment basically is a risk-inclusive undertaking, and individuals’ levels of risk taking vary depending on investment instruments and the expected returns. Successful investments must take into account relevant strategies that should aid the realization of the investment objectives. A number of investment strategies in the UK investable universe are evaluated and assessed for their performance: Small Cap vs. Large Cap Portfolios Volatility of returns is the principle determinant of whether a portfolio is a small cap or a large cap. The size of a company is determined by its market capitalization, a situation that further defines that company’s market cap. A small cap portfolio is defined by a market capitalization that is between 300 million and 2 billion. An amount less than this will enter the portfolio into a lesser marker cap, normally referred to as the micro-cap. Small cap portf olio is characterized by high volatility in the market, and the price of the stock keeps fluctuations due to the underlying market uncertainties. Large cap portfolios on the other hand are the direct opposite of small cap portfolios. Large cap portfolios are less volatile in the market, and the prices of these stocks are therefore relatively constant over time (Fama and French, 2011, p.46). Investors that prefer less volatile portfolio often opt for the large cap portfolios. However, this does not rule out risk prevalence in investment. Large cap portfolios are characterized by market capitalization of about 10 billion and above. This kind of portfolio experiences hardships in in and out trade activities. As a result, price swings are minimized, leading to the realization of consistency in its price. Value vs. Growth Portfolios Investors have different motives for investment. While some opt to invest in value stocks, others prefer growth stocks. These stocks share some common charac teristics, but their distinguishing features outline the outstanding difference between the two stocks. The valuing of stocks is done with regard to market trends, incorporating risks and benefits to the value of the stocks. Investors prefer undervalued stocks, so that once the prices of the stocks changes, they are in a position to reap huge investment returns. Value stocks are depict the flowing features: less than 10 % price earnings ratio, less than 1 price to earnings growth, current assets that are twice the current liabilities, matching debt and equity and share prices that are at par with the tangible book value or even less (Fama and French, 2011, p.53). Growth stocks are defined by their outstanding feature of expansion and ability to generate more and more returns with time. They are referred to as growth stocks because they have the ability to diversify the underlying portfolio. Growth stocks are characterized by a growth rate that is strong and reliable. This is to say that the portfolio remains vibrant and beneficial over a long period of time. It is important to account for the fact that different companies grow at different speeds and rates, and it essential that an investor be accommodative in regard to growth portfolios. Equity returns are also strong with growth stocks. Company-industry comparison is used to determine the strength of the stock returns. Growth stocks are characterized by per share earnings that surpass the industry’