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what is the plowback ratio | the plowback ratio is a fundamental analysis ratio that measures how much earnings are retained after dividends are paid out it is most often referred to as the retention ratio the opposite metric measuring how much in dividends are paid out as a percentage of earnings is known as the payout ratio the formula for the plowback ratio isthe plowback ratio is calculated by subtracting the quotient of the annual dividends per share and earnings per share eps from 1 on the other hand it can be calculated by determining the leftover funds upon calculating the dividend payout ratio text retention ratio frac text net income text dividends text net income retention ratio net incomenet income dividends on a per share basis the retention ratio can be expressed as 1 dividends per share eps 1 frac text dividends per share text eps 1 epsdividends per share for example a company that reports 10 of eps and 2 per share of dividends will have a dividend payout ratio of 20 and a plowback ratio of 80 | |
what does the plowback ratio tell you | the plowback ratio is an indicator of how much profit is retained in a business rather than paid out to investors younger businesses tend to have higher plowback ratios these faster growing companies are more focused on business development more mature businesses are not as reliant on reinvesting profit to expand operations the ratio is 100 for companies that do not pay dividends and is zero for companies that pay out their entire net income as dividends use of the plowback ratio is most useful when comparing companies within the same industry different markets require different utilization of profits for example it is not uncommon for technology companies to have a plowback ratio of 1 that is 100 this indicates that no dividends are issued and all profits are retained for business growth the plowback ratio represents the portion of retained earnings that could potentially be dividends higher retention ratios indicate management s belief of high growth periods and favorable business economic conditions lower plowback ratio computations indicate a wariness in future business growth opportunities or satisfaction in current cash holdings the plowback ratio is a useful metric for determining what companies invest in investors preferring cash distributions avoid companies with high plowback ratios however companies with higher plowback ratios could have a greater chance of capital gains achieved through appreciated stock prices during the growth of the organization investors see stable plowback ratio calculations as indicators of current stable decision making that can help shape future expectations the ratio is typically higher for growth companies that are experiencing rapid increases in revenues and profits a growth company would prefer to plow earnings back into its business if it believes that it can reward its shareholders by increasing revenues and profits at a faster pace than shareholders could achieve by investing their dividend receipts because management determines the dollar amount of dividends to issue management directly impacts the plowback ratio alternatively the calculation of the plowback ratio requires the use of eps which is influenced by a company s choice of accounting method therefore the plowback ratio is highly influenced by only a few variables within the organization example of the plowback ratiofor example on nov 29 2017 the walt disney company declared a 0 84 semi annual cash dividend per share to shareholders of record dec 11 to be paid jan 11 1 as of the fiscal year ended sept 30 2017 the company s eps was 5 73 2 its plowback retention ratio is therefore 1 0 84 5 73 0 8534 or 85 34 the retention ratio is a converse concept to the dividend payout ratio the dividend payout ratio evaluates the percentage of profits earned that a company pays out to its shareholders it is calculated simply as dividends per share divided by earnings per share eps using the disney example above the payout ratio is 0 84 5 73 14 66 this is intuitive as you know that a company keeps any money that it doesn t pay out of its total net income of 8 98 billion disney will pay out 14 66 and retain 85 34 3 | |
what is the plowback ratio | the plowback ratio is a fundamental analysis ratio that measures how much earnings are retained after dividends are paid out it is most often referred to as the retention ratio the opposite metric measuring how much in dividends are paid out as a percentage of earnings is known as the payout ratio the formula for the plowback ratio isthe plowback ratio is calculated by subtracting the quotient of the annual dividends per share and earnings per share eps from 1 on the other hand it can be calculated by determining the leftover funds upon calculating the dividend payout ratio text retention ratio frac text net income text dividends text net income retention ratio net incomenet income dividends on a per share basis the retention ratio can be expressed as 1 dividends per share eps 1 frac text dividends per share text eps 1 epsdividends per share for example a company that reports 10 of eps and 2 per share of dividends will have a dividend payout ratio of 20 and a plowback ratio of 80 | |
what does the plowback ratio tell you | the plowback ratio is an indicator of how much profit is retained in a business rather than paid out to investors younger businesses tend to have higher plowback ratios these faster growing companies are more focused on business development more mature businesses are not as reliant on reinvesting profit to expand operations the ratio is 100 for companies that do not pay dividends and is zero for companies that pay out their entire net income as dividends use of the plowback ratio is most useful when comparing companies within the same industry different markets require different utilization of profits for example it is not uncommon for technology companies to have a plowback ratio of 1 that is 100 this indicates that no dividends are issued and all profits are retained for business growth the plowback ratio represents the portion of retained earnings that could potentially be dividends higher retention ratios indicate management s belief of high growth periods and favorable business economic conditions lower plowback ratio computations indicate a wariness in future business growth opportunities or satisfaction in current cash holdings the plowback ratio is a useful metric for determining what companies invest in investors preferring cash distributions avoid companies with high plowback ratios however companies with higher plowback ratios could have a greater chance of capital gains achieved through appreciated stock prices during the growth of the organization investors see stable plowback ratio calculations as indicators of current stable decision making that can help shape future expectations the ratio is typically higher for growth companies that are experiencing rapid increases in revenues and profits a growth company would prefer to plow earnings back into its business if it believes that it can reward its shareholders by increasing revenues and profits at a faster pace than shareholders could achieve by investing their dividend receipts because management determines the dollar amount of dividends to issue management directly impacts the plowback ratio alternatively the calculation of the plowback ratio requires the use of eps which is influenced by a company s choice of accounting method therefore the plowback ratio is highly influenced by only a few variables within the organization example of the plowback ratiofor example on nov 29 2017 the walt disney company declared a 0 84 semi annual cash dividend per share to shareholders of record dec 11 to be paid jan 11 1 as of the fiscal year ended sept 30 2017 the company s eps was 5 73 2 its plowback retention ratio is therefore 1 0 84 5 73 0 8534 or 85 34 the retention ratio is a converse concept to the dividend payout ratio the dividend payout ratio evaluates the percentage of profits earned that a company pays out to its shareholders it is calculated simply as dividends per share divided by earnings per share eps using the disney example above the payout ratio is 0 84 5 73 14 66 this is intuitive as you know that a company keeps any money that it doesn t pay out of its total net income of 8 98 billion disney will pay out 14 66 and retain 85 34 3 | |
what is a point and figure p f chart | a point and figure chart plots price movements for stocks bonds commodities or futures without taking into consideration the passage of time contrary to some other types of charts like candlesticks which mark the degree of an asset s movement over set time periods p f charts utilize columns consisting of stacked x s or o s each of which represents a set amount of price movement the x s illustrate rising prices while o s represent a falling price technical analysts still utilize concepts such as support and resistance as well as other patterns when viewing p f charts some argue that support and resistance levels as well as breakouts are more clearly defined on a p f chart since it filters out tiny price movements and is less susceptible to false breakouts | |
how to calculate point and figure p f charts | point and figure charts don t require calculation but they do require at least two variables to be set one variable is the box size the box size can be a specific dollar amount such as 1 a percentage such as 3 of the current price or it can be based on average true range atr which means the box size will fluctuate based on volatility the reversal amount also needs to be set the reversal amount is typically three times the box size for example if the box size is 1 the reversal amount is 3 the reversal can be set at anything the trader desires such as one times the box size or 5 5 times the box size an optional variable is whether to use high and low prices for the underlying asset or to use closing prices using high and low prices will mean the creation of more x s and o s while using only closing prices less movement being calculated compared to high and lows will mean fewer x s and o s are created | |
what does a point and figure p f chart tell you | point and figure charts often provide technical analysts with different trade and trend signals relative to traditional candlestick or bar charts while some analysts rely more heavily on the point and figure charts others use these charts to confirm signals provided by traditional charts in an effort to avoid false breakouts the key to point and figure charting is the box size or the amount of price movement that determines whether a new x or o is added to the chart for example say the box size is 3 if the last x happened at a price of 15 a new one is added to the current column of x s when the price rises to 18 notably the line of x s continues in the same column provided that the price continues to rise and doesn t breach a predetermined reversal amount at which point a new column of o s begins the same is true for a column of o s in a declining market the column continues until the stock reaches the reversal amount at which point a new column of x s begins a reversal occurs when the price is no longer moving enough to put another x or o in the current x or o column and then the price moves at least three box sizes if this is the chosen reversal amount in the opposite direction when a reversal occurs several x s or o s will be drawn at the same time for example following a price rise or column of x s if a reversal occurs and the reversal amount is three box sizes when the reversal occurs three o s will be drawn starting one spot below the highest x traders utilize p f charts in similar ways to other charts traders still watch for support and resistance levels breakouts can signal major trend changes depending on the box size the columns themselves can represent significant trends and when the column changes from o to x or x to o that may signal a significant trend reversal or pullback point and figure analystscharles dow the founder of the wall street journal is credited with developing point and figure charting as a way to determine imbalances between supply and demand 1 one of the foremost technical analysts specializing in point and figure charting is tom dorsey who founded the research firm dorsey wright associates in 1987 he authored several books on the topic including point figure charting the essential application for forecasting and tracking market prices nasdaq purchased dorsey wright associates in 2015 2 dorsey helped to popularize the use of point and figure charts with more traditional technical indicators such as moving averages relative strength and advance decline lines the difference between point and figure p f and renko chartsrenko charts are also based on box size and when the price moves by the box size it creates an up or down brick that moves at a 45 degree angle to the prior brick renko charts never have bricks next to each other therefore a reversal occurs if the price moves in the opposite direction by two box amounts the main difference between the chart types is the look p f charts are side by side columns of x s and o s while a renko chart is created by a series of boxes spread out over time at 45 degree angles limitations of using point and figure p f chartsp f charts can be slow to react to price changes a breakout for example must move the box amount in order to signal a breakout occurred this may benefit some traders as it may reduce false breakout signals but the price has already moved the box amount or more beyond the breakout point for some traders getting the signal after the price has already moved that much may not be effective also while p f charts may help reduce the number of false breakouts false breakouts still occur what appears to be a breakout may still be reversed a short time later p f charts are good at keeping traders in strong trends as a lot of small counter trend movements are filtered out yet when a reversal occurs it can significantly erase profits or result in big losses because the reversal amount is typically so large if a trader is only using p f charts they won t see the reversal until the price has moved significantly against them | |
what is a point of purchase pop | a point of purchase pop is a term used by marketers and retailers when planning the placement of consumer products such as product displays strategically placed in a grocery store aisle or advertised in a weekly flyer this term is similar to the point of sale pos which is the point at which a customer purchases and pays for products such as on a website or at a store checkout the pop is the area that surrounds the pos where customers often encounter promotional activities or other products understanding point of purchasein recent years the point of purchase for products and services has been an area of focus for marketers pops may be real as in the case of a brick and mortar store or virtual as in the case of an electronic retailer that sells goods and services online in both cases marketers and retailers must determine the best way to showcase their products and services at the point of sale the merchant typically creates an invoice or sales order after receiving payment the seller generates a receipt for the customer merchants traditionally printed receipts however now many are delivered electronically pos systemspart of the point of purchase takes into account pos systems and experiences as well pos systems frequently use hardware or software tailored to a particular industry or business although some small retailers use off the shelf cash registers to calculate payment amounts and issue receipts most pos systems are computer based digital and incorporate other devices or peripherals such as printers barcode scanners scales and touch screens in some cases customers perform the duties that were previously performed only by checkout clerks such as scanning barcodes weighing items that are sold by weight operating pos terminals by tapping their fingers against touch screens and making payments by swiping their credit cards or inserting cash into machines also retailers use pos software for accounting warehousing and management functions such as tracking inventory and revenue the software may be used to manage inventory alerting warehouses when shelves run low or create purchase orders and automatically send them to suppliers pos software may assist management in deterring theft and employee fraud it may be integrated with a business s accounting system to enter the day s sales directly into the company s books pos innovationmodern pos systems are commonly programmable or allow enhancement with third party software programs these systems can be tailored to meet specific needs for example many retailers use pos systems to manage membership programs that award points to frequent buyers and issue discounts on future purchases cloud based pos systems are increasingly in use particularly for large online merchants to track and process numerous purchases cloud based systems can greatly reduce the upfront costs of implementing a pos system for many businesses customers can also interact directly with pos systems particularly in the hospitality industry often referred to as location based technology these systems can process transactions at customer locations for example at many restaurants customers can view menus and place orders on terminals located at their tables in hotels customers use similar terminals to place orders for room service or to pay hotel bills according to the global point of purchase pop displays markets report the global point of purchase displays market is expected to expand at a compound annual growth rate cagr of 5 9 from 2018 to 2026 although online shopping appears to be a popular shopping option customer preference for in store shopping remains strong 1to stay competitive and aid brand owners in promoting their products pop display manufacturers are focused on improving aesthetics as well as creating innovative product designs also the intensifying competition in the retail industry and the resulting use of pop displays for enticing customers to purchase products have encouraged retailers to demand different custom made displays capable of serving specific needs across different retail facilities customization offered in terms of aesthetics capacity and mobility can greatly impact a company s brand identification | |
how do points of purchase pops exist | pops may be real as in the case of a brick and mortar store or virtual as in the case of an online retailer | |
how does point of purchase work in conjunction with point of sale pos | pop takes pos systems and experiences into account pos systems frequently use hardware or software tailored to a particular industry or business | |
what does the future hold for pop | pop display manufacturers focus on improving aesthetics and on creating innovative product designs competition in the retail industry and the resulting use of pop displays encourage retailers to demand different customized displays the bottom linemarketers and retailers use a point of purchase pop when they plan the placement of consumer products examples include grocery store product displays or weekly flyer advertisements | |
what is a pos | a pos or point of sale is a device that enables merchants to process payments and log transactions it is essentially a computer based cash register with software capable of tallying up orders taking payments monitoring inventory and buying trends creating invoices and collecting marketing data pos technology includes countertop terminals and apps that let people or businesses take payments with connected devices such as smartphones a pos may be a physical device in a brick and mortar store or a checkout point in a web based store | |
how a pos works | the chief job of the pos is to calculate the total cost of an order take payment and log the transaction the process starts by recording the items to be purchased in a supermarket for example this would involve entering the items into the pos with a barcode scanner the software will record all the data including the name and quantity of the items being purchased once all the items have been added it s time to pay normally there are two options pay with cash or a card cash payments involve either inserting the relevant notes or coins into a machine or handing them over to the cashier card payments on the other hand could require either swiping inserting or tapping the card physical or virtual onto the card reader at this stage the pos will connect to the cardholder s bank potentially ask for a pin code check if there are enough funds to clear the transaction and then confirm whether the payment has been completed or rejected this all happens in a matter of seconds and ends with the generation of a receipt that confirms the conclusion of the card transaction the estimated value of the global point of sale market in 2023 1with online transactions the process is slightly different usually once you are ready to order you need to click on the checkout option and then insert if they haven t already been automatically saved your payment details that includes entering information about your card such as its number s and your address before completing the transaction your bank may also contact you to confirm if you want to proceed with the payment pos placementpoints of sale poss are an important focus for marketers because consumers tend to make purchasing decisions on high margin products or services at these strategic locations traditionally businesses set up poss near store exits to increase the rate of impulse purchases as customers leave however varying pos locations can give retailers more opportunities to micro market specific product categories and influence consumers at earlier points in the sales funnel for example department stores often have poss for individual product groups such as appliances electronics and apparel the designated staff can actively promote products and guide consumers through purchase decisions rather than simply processing transactions similarly the format of a pos can affect profit or buying behavior as this gives consumers flexible options for making a purchase benefits of pos systemselectronic pos software systems streamline retail operations by automating the transaction process and tracking important sales data basic systems include an electronic cash register and software to coordinate data collected from daily purchases retailers can increase functionality by installing a network of data capture devices including card readers and barcode scanners depending on the software features retailers can track pricing accuracy inventory changes gross revenue and sales patterns using integrated technology to track data helps retailers catch discrepancies in pricing or cash flow that could lead to profit loss or interrupt sales pos systems that monitor inventory and buying trends can help retailers avoid customer service issues such as out of stock sales and tailor purchasing and marketing to consumer behavior pos innovationmodern pos systems are commonly programmable or allow enhancement with third party software programs these systems can be tailored to meet specific needs for example many retailers use pos systems to manage membership programs that award points to frequent buyers and issue discounts on future purchases cloud based pos systems are increasingly in use particularly for large online merchants to track and process numerous purchases cloud based systems can greatly reduce the upfront costs of implementing a pos system for many businesses customers can also interact directly with pos systems particularly in the hospitality industry often referred to as location based technology these systems can process transactions at customer locations for example at many restaurants customers can view menus and place orders on terminals located at their table in hotels customers use similar terminals to place orders for room service or to pay hotel bills another innovation is the use of mobile devices such as tablets and smartphones as pos terminals to stay competitive and aid brand owners in promoting their products pos display manufacturers are focused on improving aesthetics and creating innovative product designs also the intensifying competition in the retail industry and resulting use of pos displays for enticing customers to purchase products have encouraged retailers to demand different custom made displays capable of serving specific needs across different retail facilities customization offered in terms of aesthetics capacity and mobility can greatly impact a company s brand identification further innovation keeps happening all the time for example amazon experimented and rolled out for a while a cashierless just walk out option at fresh grocery stores which enabled customers to pay for an item simply by leaving the store the tech giant has since ditched this option in favor of dash carts which let you scan items as you place them into your shopping cart and then leave the store without queuing at checkouts 23 | |
what was the first point of sale pos system | the first point of sale pos system was the cash register which was invented in 1879 by james ritty a saloon owner in ohio users were able to record transactions on the register allowing for better bookkeeping and capital management ritty sold his invention to national cash register ncr corp five years later 4 | |
what are the advantages of a pos system | advantages of a pos system include | |
what are the disadvantages of a pos system | disadvantages of a pos system include the bottom linea point of sale pos device processes transactions by retail customers such a device may be physical in a brick and mortar store or virtual as a checkout point in an online store the software for pos devices allows retailers to monitor inventory and buying trends track pricing accuracy and collect marketing data | |
what is a poison pill | poison pills are a defense strategy used by the directors of a public company to prevent activist investors competitors or other would be acquirers from taking control of the company there are several types of poison pills the most common type is the flip in executed by issuing more shares to all shareholders except the offending acquirer thus lowering the amount of control they have or could obtain another goal is to force the entity trying to acquire the company to negotiate with the company s board for a buyout price courts have upheld poison pills as a legitimate defense by corporate boards which are not obligated to accept any offer they do not deem to be in the company s long term interest 1theresa chiechi investopedia | |
how poison pills work | the poison pill is a tactic companies use to deter takeovers by unwanted companies often called a shareholder rights plan it is meant to frustrate creeping acquisitions of control in which the acquirer seeks to accumulate a controlling or dominant stake without negotiating with the board or offering the same deal to every shareholder because many shares come with ownership and voting rights it is possible to own enough to purchase a controlling amount of shares with voting rights so if one entity owns the right amount of shares their votes weigh more than those with fewer shares to prevent this the potential target creates a provision that prevents hostile takeovers by establishing a share ownership limit this provision may specify that if a single entity or person acquires a stake of 15 or more the company implements a share issuance or other measure that makes the hostile action ineffective or undesirable in a flip in all other shareholders become eligible to acquire additional shares for a large discount or free the party with the 15 stake is excluded from the stock issuance this increases the number of outstanding shares and dilutes that party s stake thus averting the takeover while takeovers are still commonplace hostile takeovers are not as common as they used to be because of tools like poison pills special considerationsproxy advisory firms glass lewis and international shareholder services traditionally opposed poison pills because of their potential to entrench managers unresponsive to shareholders as of 2022 iss guidelines called for poison pills to have a term of no more than three years and a trigger of no lower than 20 of shares outstanding 2 glass lewis generally opposes poison pills with case by case exceptions for those limited in scope and motivated by a particular threat or objective 3advantages and disadvantages of a poison pilla company s board has a fiduciary duty to protect the interests of all shareholders while an outsider seeking control may only wish or need to satisfy a minority to gain effective control through a tender offer a poison pill helps prevent majority control takeovers that disregard the interests of minority shareholders it also discourages vulture bids seeking to take advantage of a temporary decline in a share price for instance market declines at the outset of the covid 19 pandemic led hundreds of u s companies to adopt shareholder rights plans 4companies with poison pill defenses have tended to garner higher takeover premiums than those without them 5 industrial gasses supplier airgas which deployed a poison pill to resist a hostile takeover by rival air products and chemicals apd in a landmark legal battle sold four years later to air liquide for more than twice as much as air products offered 6by discouraging a motivated buyer from buying more company stock a poison pill will likely leave a share price lower than it would be otherwise at least in the short run poison pills can also shield underperforming board members from shareholder efforts to replace them the good news on that score is that replacing a company board in a proxy contest can make a poison pill disappear if the new board chooses to do so because poison pills discriminate against activist buyers and restrain trading in a company s stock they typically require justification and often have sunset provisions 7 a sunset provision is a clause that expires automatically at a certain date prevents majority control takeovers that don t consider minority shareholder interestsdiscourages vulture bids that want to benefit from temporary share price declinescome with higher takeover premiums than those without themleaves share price lowershields underperforming board members from efforts to replace themrequires justificationcomes with sunset provisionstypes of poison pillsmost poison pills are triggered by the accumulation of a company stake above a preset threshold these are known as flip in shareholder rights plans in contrast to the seldom used flip over ones this type of poison pill is just like a reverse takeover it occurs when a company allows itself to be acquired by another public company and then lets shareholders buy shares of the acquirer at a discount 8a dead hand or slow hand poison pill limits a future board s ability to remove that provision by specifying that it can only be canceled by a board majority consisting of current directors or the successors they choose delaware the corporate domicile state of two thirds of fortune 500 companies and most recent initial public offerings bars dead hand poison pills while georgia and pennsylvania courts have upheld them 910poison pills often include wolf pack clauses applicable to the aggregate holdings of shareholders acting in concert without expressly agreeing to do so for example hedge fund managers commonly accumulate separate stakes in companies pursuing a common activist agenda without communicating the intent 11examples of poison pillsthe poison pill tactic has been around since the 1980s when it was devised by new york law firm wachtell lipton rosen and katz amid a wave of hostile takeover and greenmail attempts by corporate raiders since rebranded as activist investors 12 courts have ruled that poison pills are a legitimate defense against such attempts to circumvent a company board s prerogatives 13in early april 2022 elon musk threatened social media giant x with a hostile takeover by disclosing that he purchased 9 of the company s shares x adopted a poison pill provision to prevent the takeover in mid april 2022 it used 15 as its ownership threshold which prevented anyone from taking over the company without bargaining for a fair value by the end of april the company agreed to a buyout by elon musk 1415musk ended up purchasing the company in october 2022 for 44 billion 16in july 2018 the board of restaurant chain papa john s pzza voted to adopt a poison pill to prevent ousted founder john schnatter from gaining control of the company schnatter who owned 30 of the company s stock was the company s largest shareholder 17to deter a takeover attempt by schnatter the board adopted a poison pill expiring after a year that would permit the company to sell its stock to shareholders for half its market price if schnatter and his affiliates increased their stake to 31 or if anyone else amassed a 15 stake as with all poison pills those triggering the provision would not be allowed to buy stock on the same discounted terms effectively diluting their stake | |
when announcing the poison pill s adoption the company stated | schnatter filed suit over some of the poison pill s provisions settling it the following year along with other litigation against the company 19 he reduced his stake to less than 4 by 2020 20in 2012 netflix nflx announced a poison pill days after billionaire investor carl icahn and affiliates disclosed a stake of nearly 10 the poison pill promised to dilute the stake of anyone acquiring more than 10 of the video streaming service provider by allowing other shareholders to purchase two shares for the price of one 721in disclosing their stake icahn affiliates suggested netflix may hold significant strategic value for a variety of significantly larger companies adding they were considering ways for netflix to maximize shareholder value 22the icahn funds criticized the company s adoption of a poison pill in an updated securities filing any poison pill without a shareholder vote is an example of poor corporate governance and the pill netflix just adopted is particularly troubling due to its remarkably low and discriminatory 10 threshold they said 23icahn s stake was later reduced and eventually it was sold for a hefty gain 24 | |
why are poison pills used | poison pills prevent an activist investor or a potential acquirer from gaining control of a publicly traded company without the consent of the company s board deals involving the board s consent to a change of control typically provide a significant premium over the market price for all shareholders in contrast to the share purchases in market transactions the poison pills seek to deter | |
what are the disadvantages of poison pills | poison pills can help self serving incumbent managers and boards frustrate shareholder efforts to oust them to improve the company s performance as a result corporate governance advisors recommend companies limit their scope and duration ensure that such plans address a specific goal or threat and have a high triggering threshold | |
what s the legal precedent for poison pills | in delaware where many large listed companies are incorporated the courts have held that corporate boards have broad discretion in preventing the accumulation of controlling stakes provided their response is proportional and based on a reasonable perception of a threat 25the bottom linepoison pills are provisions companies include in their stock issuances that prevent anyone from gaining a controlling stake they usually have share ownership thresholds set that trigger the issue of more shares to stockholders for a discount or for free thus poison pills reduce a would be acquirer s stake in a company forcing them to negotiate with the board for ownership rather than forcing their way in through stock ownership | |
what is a poisson distribution | in statistics a poisson distribution is a discrete probability distribution that tells how many times an event is likely to occur over a specified period it is a count distribution the parameter of which is lambda the mean number of events in the specific interval as the poisson distribution is a discrete function the variable can only take specific values in a potentially infinite list put differently the variable cannot take all values in any continuous range for the poisson distribution the variable can only take whole number values 0 1 2 3 etc with no fractions or decimals poisson distributions are often used to understand independent events that occur at a constant rate within a given interval of time it was named after french mathematician sim on denis poisson understanding poisson distributionsa poisson distribution can be used to estimate how likely it is that something will happen x number of times for example if the average number of people who buy cheeseburgers from a fast food chain on a friday night at a single restaurant location is 200 a poisson distribution can answer questions such as what is the probability that more than 300 people will buy burgers the application of the poisson distribution thereby enables managers to introduce optimal scheduling systems that would not work with say a normal distribution one of the most famous historical practical uses of the poisson distribution was estimating the annual number of prussian cavalry soldiers killed due to horse kicks modern examples include estimating the number of car crashes in a city of a given size in physiology this distribution is often used to calculate the probabilistic frequencies of different types of neurotransmitter secretions or if a video store averaged 400 customers every friday night what would have been the probability that 600 customers would come in on any given friday night formula for the poisson distributionf x xx e where e euler s number e 2 71828 x number of occurrencesx factorial of x equal to the expected value ev of x when that is also equal to its variance begin aligned f x frac lambda x x e lambda textbf where e text euler s number e 2 71828 dots x text number of occurrences x text factorial of x lambda text equal to the expected value ev of x text when that is also equal to its variance end aligned f x x x e where e euler s number e 2 71828 x number of occurrencesx factorial of x equal to the expected value ev of x when that is also equal to its variance given data that follows a poisson distribution it appears graphically as in the example depicted in the graph above assume that some operational process has an error rate of 3 if we further assume 100 random trials the poisson distribution describes the likelihood of getting a certain number of errors over some period of time such as a single day if the mean is very large then the poisson distribution is approximately a normal distribution the poisson distribution in financethe poisson distribution is also commonly used to model financial count data where the tally is small and is often zero as one example in finance it can be used to model the number of trades that a typical investor will make in a given day which can be 0 often 1 or 2 etc as another example this model can be used to predict the number of shocks to the market that will occur in a given time period say over a decade | |
when should the poisson distribution be used | the poisson distribution is best applied to statistical analysis when the variable in question is a count variable for instance how many times x occurs based on one or more explanatory variables for instance to estimate how many defective products will come off an assembly line given different inputs | |
what assumptions does the poisson distribution make | in order for the poisson distribution to be accurate all events are independent of each other the rate of events through time is constant and events cannot occur simultaneously moreover the mean and the variance will be equal to one another | |
is the poisson distribution discrete or continuous | because it measures discrete counts the poisson distribution is also a discrete distribution this can be contrasted with the normal distribution which is continuous the bottom linea poisson distribution is a probability distribution that is used to predict the amount of variation from an average rate of occurrence in a given time frame it s also a discrete function meaning that the variable can only take whole number values and no fractions or decimals the poisson distribution can be a helpful tool to evaluate and predict financial and trading operations | |
what is a political action committee pac | in the u s a political action committee pac is a political committee that pools campaign contributions from members and donates those funds to campaigns for or against candidates ballot initiatives or legislation pacs are typically formed to represent business labor or ideological interests by individuals who wish to privately raise money to donate to a political campaign the first pac was formed in 1944 in order to raise money for the re election of then president franklin d roosevelt | |
how a political action committee works | at the federal level an organization is considered a pac when it receives or spends more than 1 000 for the purpose of influencing a federal election there are many types of restrictions that guide how pacs are able to fundraise and to donate their contributions to political campaigns or causes they can contribute 5 000 to a candidate committee per election they can also give up to 15 000 annually to any national party committee and 5 000 annually to any other pac pacs may receive up to 5 000 from any one individual pac or party committee per calendar year 1a pac must register with the u s federal election committee within 10 days of its formation and it must provide the name and address for the pac its treasurer and any affiliated organizations for the purpose of contribution limits all affiliated pacs are treated as one donor pacs are also required to disclose information about all individuals who contribute to them however sometimes these names are not disclosed until after an election meaning that their contributors may not be transparent to the public while votes are still being cast types of political action committees pacs there are many categories of pacs including separate segregated funds ssfs nonconnected committees super pacs and leadership pacs corporations labor unions membership organizations or trade associations can establish separate segregated funds ssfs once established these committees can only receive contributions from individuals that are associated with that connected or sponsoring organization unlike ssfs nonconnected committees are not sponsored by a specific entity or organization as a result they can accept contributions from the general public super pacs can receive unlimited contributions from individuals corporations labor unions and other pacs a hybid pac can act as both a pac and a super pac hybrid pacs must maintain segregated bank accounts for their unlimited super pac activities and their normal pac fundraising and contributions which are subject to the same statutory limitations as a regular pac 2 a leadership pac is a pac that is established by a candidate or an individual holding federal office it is common for members of congress and other political leaders to establish leadership pacs in order to support candidates for various elected offices leadership pacs can only contribute up to 5 000 per election to a federal candidate committee pacs vs super pacssuper pacs were created in 2010 after the u s court of appeals decision in speechnow org v federal election committee this decision allowed for a greater level of deregulation as to how political funds are raised and distributed while super pac funds cannot be donated directly to a campaign super pac managers and political candidates are permitted to collaborate and discuss strategy since the inception of super pacs they have quickly grown to be a hugely influential force in american politics in fact it is estimated that during the 2012 republican primaries super pacs spent more money than individual candidates campaigns did 3 the majority of this money was donated by individuals rather than businesses special considerationscorporations cannot contribute directly to a campaign however the 2010 supreme court decision in citizens united v federal election committee made it legal for corporations to support a pac the decision overruled the 2002 campaign reform act which prevented corporations unions and other entities from donating money to political campaigns the new laws allow these entities to contribute a limited amount of money to a pac which can in turn be donated to a campaign in the case of super pacs a corporation can contribute an unlimited amount of money even though this money can t be directly given to a campaign it can be spent to indirectly influence an election | |
what is an example of a pac | there are plenty of examples of pacs in various sizes one of the biggest pacs in terms of contributions to candidates is the national association of realtors pac which was formed by the national association of realtors to promote the interests of its industry 4who can start a pac individuals and groups can set up nonconnected committees which may accept contributions from the general public corporations labor unions and trade associations can establish separate segregated funds which can only accept contributions from their members 5 | |
what are advantages of super pacs | unlike traditional pacs there are no limits to how much a super pac can fundraise from contributors including corporations individuals unions and others in addition while super pacs disclose their contributors contributors themselves can shield their identities such as through the use of shell corporations the bottom linepacs are political committees that pool campaign contributions and direct them to campaigns based on their interests pacs can take on many forms and there are rules that govern how they can fundraise and what they must disclose today pacs are hugely influential in elections superpacs are especially so as they are able to fundraise from corporations individuals unions and others without limit | |
what is political economy | political economy is an interdisciplinary branch of the social sciences it focuses on the interrelationships of individuals governments and public policy political economists study how economic theories such as capitalism socialism and communism work in the real world any economic theory is a means of directing the distribution of a finite amount of resources in a way that benefits the greatest number of individuals these ideas can be studied both theoretically and as they are actually used public policy that is created and implemented derive from these economic theories political economists study both the underlying roots of these policies and their results investopedia zoe hansenunderstanding political economypolitical economy is a branch of social science that studies the relationship that forms between a nation s population and its government when public policy is enacted it is therefore the result of the interaction between politics and the economy and is the basis of the social science discipline 1those who research the political economy are called political economists their study generally involves the examination through a sociological political and economic lens of how public policy the political situation and political institutions impact a country s economic standing and future in a wider sense political economy was once the common term used for the field we now call economics adam smith john stuart mill and jean jacques rousseau all used the term to describe their theories 2 the shorter term economy was substituted in the early 20th century with the development of more rigorous statistical methods for analyzing economic factors 34types of political economythere are several notable types of political economies political economy may draw upon sociology economics and political science to define how government an economic system and politics influence each other history and development of political economythe roots of political economy as we know it today go back to the 18th century scholars during the period studied how wealth was distributed and administered between people some of the earlier works that examined this phenomenon include those by adam smith and john stuart mill 89but the term is probably best ascribed to the french writer and economist antoine de montchrestien he wrote a book called trait de l conomie politique in 1615 in which he examined the need for production and wealth to be distributed on an entirely larger scale not in the household as aristotle suggested the book also analyzed how economics and politics are interrelated 10smith was a scottish philosopher economist and writer who is commonly referred to as the father of economics and of the political economy he wrote about the function of a self regulating free market in his first book which was called the theory of moral sentiments 11 his most famous work an inquiry into the nature and causes of the wealth of nations or the wealth of nations for short helped shape classical economic theory it was considered the foundation for the field of study by future economists 8the englishman mill combined economics with philosophy he believed in utilitarianism that actions that lead to people s goodwill are right and that those that lead to suffering are wrong 9 in essence he believed that economic theory and philosophy were needed along with social awareness in politics to make better decisions for the good of the people some of his work including principles of political economy utilitarianism and a system of logic made him one of the most important figures in politics and economics importance of political economypolitical economy studies both how the economy affects politics and how politics affect the economy as political parties come to and leave power economic policy often changes in a country in accordance with the ideology and goals of the party in power 12political changes can impact many areas of the economy which can in turn impact elections and government policies these areas include as the economies of more countries become interconnected through globalism and international trade the politics of one country can have a strong impact on the economy of another understanding the relationship between political power and economic decisions in one country can help other countries predict how their own economies will be impacted understanding political economy can also help a country s economy become more resilient if the government leaders in power at any given moment are forward thinking they can try to put laws and policies in place that create the greatest possibility for economic stability and growth regardless of changing political power 12political economy is still a widely used term that describes any government policy that has an economic impact political economy in academiapolitical economy has become an academic discipline of its own many major institutions offer the study as part of their political science economics and sociology departments political economists conduct research to determine how public policy influences behavior productivity and trade this work helps them establish how money and power are distributed between people and different groups they may study specific fields such as law bureaucratic politics legislative behavior the intersection of government and business and regulation 14the study may be approached in any of three ways modern applications of political economymodern applications of the political economy involve the study of later philosophers and economists such as karl marx as mentioned above marx became disenchanted with capitalism as a whole he believed that individuals suffered under regimented social classes where one or more individuals controlled the greater proportion of wealth under communist theories this would be eradicated allowing everyone to live equally while the economy functions based on the ability and needs of each participant under communist regimes resources are controlled and distributed by the government 7many people confuse socialism and communism it s true there are some similarities notably that both stress bridging the gap between rich and poor and that society should relegate equilibrium among all citizens but there are inherent differences between the two while resources in a communist society are owned and controlled by the government individuals in a socialist society hold property people can still purchase goods and services under socialism while those who live in a communist society are provided with their basic necessities by the government 17 | |
what does political economy mean | the term political economy refers to a branch of social sciences that focuses on relationships between individuals governments and public policy it is also used to describe the policies set by governments that affect their nations economies | |
what is the primary concern of political economy | the main concerns of political economy are the relationship between governments and individuals and how public policy affects society these are determined through the study of sociology politics and economics | |
what are the characteristics of political economy | some of the characteristics or themes of a political economy include the distribution of wealth how goods and services are produced who owns property and other resources who profits from production supply and demand and how public policy and government interaction impact society who coined the term political economy adam smith is generally considered the father of economics and of the political economy but the term is generally ascribed to french economist antoine de montchrestien who wrote the book trait de l conomie politique which translates to the treaty of the political economy 1110the bottom linepolitical economy is a branch of the social sciences that studies the relationships between individuals governments and public policy it examines how the realm of politics impacts the economy and how the economy impacts politics as political parties change a country s economic policy often changes as well based on the ideology and goals of the party in power this can impact areas of the economy such as monetary and fiscal policy food security labor crises rising inequality gdp and disaster management these changes in the economy can in turn prompt new political laws policies or election outcomes the rise of globalism and international trade means that the politics of one country can have a strong impact on the economy of another understanding political economy can help countries become more resilient in the face of global economic changes | |
what is political risk | political risk is the risk an investment s returns could suffer as a result of political changes or instability in a country instability affecting investment returns could stem from a change in government legislative bodies other foreign policymakers or military control political risk is also known as geopolitical risk and becomes more of a factor as the time horizon of investment gets longer they are considered a type of jurisdiction risk breaking down political riskpolitical risks are notoriously hard to quantify because there are limited sample sizes or case studies when discussing an individual nation some political risks can be insured against through international agencies or other government bodies the outcome of political risk could drag down investment returns or even go so far as to remove the ability to withdraw capital from an investment types of political risksaside from business factors arising from the marketplace businesses are also impacted by political decisions there are a variety of decisions governments make that can affect individual businesses industries and the overall economy these include taxes spending regulation currency valuation trade tariffs labor laws such as the minimum wage and environmental regulations the laws even if just proposed can have an impact regulations can be set at all levels of government including federal state and local as well as in other countries some of the political risks may be found in a company s filings with the securities and exchange commission sec or a prospectus if it is a mutual fund insuring against political riskscompanies that operate internationally known as multinational businesses can purchase political risk insurance to remove or mitigate certain political risks this allows management and investors to concentrate on the business fundamentals while knowing losses from political risks are avoided or limited typical actions covered include war and terrorism an examplewal mart stores inc outlined certain political risks it faces in its fiscal 2015 10 k filing with the sec under its operating risk section in its risks associated with suppliers wal mart mentioned potential political and economic instability in the countries that foreign suppliers operate labor problems and foreign trade policies and tariffs that could be imposed in its regulatory compliance reputational and other risks section the company outlines risk associated with legislative judicial regulatory and political economic risks risk factors mentioned include political instability legal and regulatory constraints local product safety and environmental laws tax regulations local labor laws trade policies and currency regulations wal mart mentioned brazil specifically and the complexity of its federal state and local laws | |
what is a ponzi scheme | a ponzi scheme is an investment scam that pays early investors with money taken from later investors to create an illusion of big profits a ponzi scheme promises a high rate of return with little risk to the investor it relies on word of mouth as new investors hear about the big returns earned by early investors inevitably the scheme collapses when the flow of new money slows making it impossible to keep up the payments of alleged profits a ponzi scheme is similar to a pyramid scheme in that both use new investors funds to pay earlier backers a pyramid scheme usually relies on rewarding early participants to recruit more participants but collapses when the supply of potential participants dwindles investopedia nono floresunderstanding ponzi schemesa ponzi scheme is a type of investment fraud in which investors are promised big profits at little or no risk the money is not invested rather the scam artist concentrates on attracting more investors a growing number of victims is needed to pay out the supposed profits being distributed to earlier investors | |
when the flow of new investment slows the scam artist doesn t have enough money to pay out those supposed profits that s when the ponzi scheme collapses | origins of the ponzi schemethe ponzi scheme gets its name from a swindler named charles ponzi who in 1920 became a millionaire by promoting a nonexistent investing opportunity 1ponzi wasn t the first to perpetrate this type of fraud earlier schemes were reported in the 19th century and charles dickens dramatized the methods in two novels the life and adventures of martin chuzzlewit 1844 and little dorrit 1857 23charles ponzi s original scheme conceived in 1919 focused on the u s postal service and international mail he received correspondence from someone in spain who had prepaid international postage this international postage reply coupon could be exchanged in the u s for postage to send a reply back to spain this gave ponzi an idea 4there were tiny differences between the charges for the coupons and their redemption prices based on differences in currency exchange rates scaled up this could return a profit the concept was a form of arbitrage which is not illegal ponzi schemes rely on a constant flow of new investments to continue to provide returns to earlier investors however ponzi was hardly engaging in this practice it would eventually be discovered that he only had 61 worth of these postal coupons he was collecting money from investors and paying out just enough to keep the scheme going 4it lasted until august 1920 when the boston post began investigating ponzi s securities exchange company and its promise of a 50 return in 90 days and later just 45 days ponzi was arrested by federal authorities on august 12 1920 and charged with several counts of mail fraud he served time in federal prison 54after his release he was tried and convicted on state charges in massachusetts he then spent time running from the law and being arrested in other states before being imprisoned in massachusetts to serve his sentence following his release from state prison ponzi was deported to his native italy 45bernie madoff and the biggest ponzi scheme evercharles ponzi didn t run the last ponzi scheme in 2008 bernard madoff was convicted of running a ponzi scheme that falsified trading reports to show his clients were earning profits on investments that didn t exist madoff promoted his ponzi scheme as an investment strategy called the split strike conversion that traded in blue chip stocks and options madoff simply used historical trading data to create false records of profits from trading activity that never occurred during the 2008 global financial crisis investors began to withdraw funds from madoff s firm exposing the company s illiquid nature madoff eventually admitted that his firm had 50 billion of liabilities owed to 4 800 clients however the government determined the real size of the fraud to be 64 8 billion sentenced to 150 years in prison and forfeiture of 170 billion in assets madoff died in prison on april 14 2021 6789ponzi schemes can be carried out over decades it is suspected that madoff s ponzi scheme started in the early 1980s and lasted over 20 years 10ponzi scheme red flagsregardless of the technology used in the ponzi scheme most share similar characteristics the securities and exchange commission sec has identified the following traits to watch for | |
what is an example of a ponzi scheme | adam promises a 10 return on a 1 000 loan to his friend barry barry gives adam 1 000 with the expectation that he ll be paid 1 100 in one year next adam promises 10 returns to his friend christine christine gives adam 2 000 with 3 000 now on hand adam pays barry his 1 100 he spends the rest of the money confident that he can persuade someone else to give him money before christine s money is due to be repaid the best ponzi schemes however rely on long term investors if adam can persuade barry and christine to let him continue to invest their money he ll need to pay them only the periodic interest he has promised he can spend the rest confident that new investors will supply enough to keep the scam running | |
what s the difference between a ponzi scheme and a pyramid scheme | both a ponzi scheme and a pyramid scheme rely on a steady stream of new investors who are motivated by reports of the big profits earned by early investors a ponzi scheme repays each investor using money deposited by new investors falsifying records of nonexistent transactions to characterize the money as profit a pyramid scheme usually promises a lucrative business opportunity that requires an initial investment each investor is rewarded for attracting new investors the earliest participants really do make a profit earning money for every new recruit and those the new recruit signs up each new recruit makes less money than the previous one until no more recruits can be found | |
why is it called a ponzi scheme | ponzi schemes are named after charles ponzi a businessman who successfully persuaded tens of thousands of clients to invest their money in a nonexistent venture for a guaranteed high profit ponzi s earliest clients got their money but it was paid out of money contributed by later investors ponzi made millions before his con was exposed 4 | |
how do you identify a ponzi scheme | the sec has identified a few traits that often signify a fraudulent financial scheme if an investment opportunity guarantees a specific high rate of return guarantees that return by a certain time and is not registered with the sec the sec advises caution 11 | |
what is the most famous ponzi scheme | the most famous modern ponzi scheme was orchestrated by bernie madoff his firm defrauded thousands of investors out of billions of dollars over decades the scheme unraveled when he was unable to meet an unexpectedly high level of withdrawals the bottom linethe con artists who create ponzi schemes aren t investing their clients money in anything they are creating an illusion of profits by paying early investors from the funds deposited by later investors meanwhile they are pocketing the bulk of the money for their own use beware of promises of steady high profits at no risk to you | |
what are pooled funds | pooled funds are funds in a portfolio from many individual investors that are aggregated for the purposes of investment mutual funds hedge funds exchange traded funds pension funds and unit investment trusts are all examples of professionally managed pooled funds investors in pooled funds benefit from economies of scale which allow for lower trading costs per dollar of investment and diversification the basics of pooled fundsgroups such as investment clubs partnerships and trusts use pooled funds to invest in stocks bonds and mutual funds the pooled investment account lets the investors be treated as a single account holder enabling them to buy more shares collectively than they could individually and often for better discounted prices mutual funds are among the best known of pooled funds actively managed by professionals unless they are index funds they spread their holdings across various investment vehicles reducing the effect that any single or class of securities has on the overall portfolio because mutual funds contain hundreds or thousands of securities investors are less affected if one security underperforms another type of pooled fund is the unit investment trust these pooled funds take money from smaller investors to invest in stocks bonds and other securities however unlike a mutual fund the unit investment trust does not change its portfolio over the life of the fund and invests for a fixed length of time advantages and disadvantages of pooled fundswith pooled funds groups of investors can take advantage of opportunities typically available to only large investors in addition investors save on transaction costs and further diversify their portfolios because funds contain hundreds or thousands of securities investors are less affected if one security underperforms the professional management helps to make sure investors receive the best risk return tradeoff while aligning with their work with the fund s objectives this management helps investors who may lack the time and knowledge for handling their own investments entirely mutual funds in particular offer a range of investment options for the highly aggressive mildly aggressive and risk averse investor mutual funds allow for the reinvestment of dividends and interest that can purchase additional fund shares the investor saves money by not paying transaction fees to hold all of the securities contained in the fund s portfolio basket while growing his portfolio diversification lowers risk economies of scale enhance buying power professional money management is available minimum investments are low commissions and annual fees are incurred fund activities may have tax consequences individual lacks control over investments diversification can limit upside | |
when investing in a professionally managed fund an investor gives up control to the money manager running it in addition he incurs additional costs in the form of management fees charged annually as a percentage of the assets under management aum fees reduce a fund s total return | some mutual funds also charge a load or sales charge funds will vary on when this fee is billed but most common are front end loads paid at the time of purchase and back end loads paid at the time of divesting an investor will file and pay taxes on fund distributed capital gains these profits are spread evenly among all investors sometimes at the expense of new shareholders who did not get a chance to benefit over time from the sold holdings if the fund sells holdings often capital gains distributions could happen annually increasing an investor s taxable income example of a pooled fundthe vanguard group inc is one of the world s largest investment management companies and providers of retirement plan services the firm offers hundreds of different mutual funds etfs and other pooled funds to investors around the world for example its canadian subsidiary vanguard investments canada offers canadian investors many pooled fund products these products include 39 canadian etfs and four mutual funds along with 12 target retirement funds and eight pooled funds the two latter groups are available to institutional investors one of the pooled funds vanguard global ex canada fixed income index pooled fund cad hedged invests in foreign bonds in april 2019 it took a new benchmark the bloomberg global aggregate ex cad float adjusted and scaled index to take advantage of including the chinese government policy bank bonds in its canadian portfolio offering | |
what is population | population is a statistical term that designates the pool from which a sample is drawn for a study any selection grouped by a common feature can be considered a population a sample is a statistically significant portion of a population understanding populationsstatisticians scientists and analysts prefer to know the characteristics of every entity in a population to draw the most precise conclusions possible this is impossible or impractical most of the time however because population sets tend to be quite large a sample of a population must usually be taken because the characteristics of every individual in a population can t be measured due to constraints of time resources and accessibility the term individual doesn t always mean a person in statistics an individual is a single entity in the group being studied there s no real way to gather data on all the great white sharks in the ocean which is a population finding and tagging each one isn t feasible marine biologists instead tag the great whites they can as a sample they begin collecting information on them to make inferences about the entire population of great whites this is a random sampling approach because the initial encounters with tagged great whites are entirely random a valid statistic can be drawn from either a sample or a study of an entire population the objective of a random sample is to avoid bias in the results a sample is random when every member of the whole population has an equal chance to be selected to participate 1 | |
how to measure a population | the difficulty in measuring a population lies in whatever you re attempting to analyze and what you re trying to accomplish data must be collected through surveys measurements observation or other methods gathering the data on a large population generally isn t done because of the costs time and resources required to obtain it all the doctors with patients who could use drug xyz in the u s likely weren t contacted to confirm this if you see an advertisement that claims 62 of doctors recommend xyz for their patients rather 62 of the doctors who responded to the several hundred or thousands of surveys that were sent out responded that they would recommend xyz this is a population sample population and investinga parameter is a characteristic of a population a statistic is a characteristic of a sample and samples can only result in inferences about a population characteristic inferential statistics allow you to make an educated guess about a population parameter based on a statistic computed from a sample randomly drawn from that population 2statistics such as averages or means and standard deviations are referred to as population parameters when they re taken from populations many such as a population s mean and standard deviation are represented by greek letters like mu and sigma these statistics are inferential in nature much of the time because samples are used rather than populations you don t have to use statistical inference if you have all the data for the population being studied because you won t have to use a sample of the population market and investment analysts use statistics to analyze investment data and make inferences about the market a specific investment or an index financial analysts can evaluate an entire population in some cases because price data has been recorded for decades the price of every publicly traded stock could be analyzed for a total market evaluation because the prices are recorded this is a population in terms of investment analysis an analyst can calculate parameters with all this data but the parameters used by analysts are only occasionally used in the same way that statisticians and scientists use them some of the parameters you might see used by investment analysts statisticians and scientists and their differences are alpha the excess returns of an asset compared to a benchmarkstandard deviation average amount of variability in prices used to measure volatility and riskmoving average used to smooth out short term price fluctuations to indicate trendsbeta measures the performance of an investment portfolio against the market as a wholealpha the probability of making a type i error or rejecting the null hypothesis when it is truestandard deviation average amount of variability in datamoving average smooths out short term fluctuations in data valuesbeta the probability of making a type ii error or incorrectly failing to reject the null hypothesis | |
what is a population mean | a population mean is the average of whatever value you re measuring in a given population 3 | |
what are two examples of population | an example of a population might be all green eyed children in the u s under age 12 another could be all the great white sharks in the ocean | |
what is the best example of a population | imagine you re a teacher trying to see how well your fifth grade math class did on a standardized test compared to all fifth graders in the u s the population would be all fifth grade math scores in the country the bottom linea population is the statistical pool being studied from which data is extracted populations can be difficult to gather data on especially if the studied topic is expansive and widely dispersed studying humans is an excellent example there s no way to gather data on every brown eyed person in the world so random sampling is the only way to infer anything about that population populations in investment analysis are generally specific types of assets being analyzed these data sets are generally small in statistical terms and easy to acquire because they ve been recorded unlike data on living organisms which is much more difficult to obtain | |
what is pork barrel politics | pork barrel politics refers the legislative practice of slipping funding for a local project into a broader budget even when said project may have little or nothing to do with the larger bill often this funding may primarily benefit the legislator s home district serving to garner or preserve political support among constituents pork barreling can have the effect of substantially inflating the cost of legislation in modern politics pork barreling and earmarking may be seen as virtually synonymous on the other hand one could argue that pork barrel politics is simply a justified form of advocacy by legislators for their constituents understanding pork barrel politicspork barrel politics have been criticized for a number of reasons for some it raises concerns about wasteful spending pork barrel projects can be costly for the larger public to fund while only benefitting a more narrow group it can also be seen as unethical for elected officials to support projects simply to solidify political support for themselves or to provide lucrative contracts to their allies each year the fiscally conservative nonprofit organization citizens against government waste cagw publishes a compendium titled the congressional pig book which documents pork barrel projects in the federal budget cagw defines a pork barrel project as a line item in an appropriations bill that designates tax dollars for a specific purpose while circumventing established budgetary procedures 1 entries in the book need to satisfy at least two of following seven criteria in addition to all of the above a project or program must have appeared in prior years as an earmark in order to qualify as a pork barrel project the bipartisan budget act removed all constraints on pork barrel projects in 2018 the number of such projects and their overall price tag soared in 2019 2pork barrel vs earmarkspork barrel politics is an age old practice often the less pejorative term earmarking can refer to a similar idea in both cases sums of money are inserted as line items in the federal budget aimed at funding a specific project however the two terms are not identical projects that are earmarked may not be strictly local initiatives as pork barrel projects typically are for example a legislator who has or wants a strong base of support among educators or technology companies might add an earmark to the budget that funds a pet project of one of those constituencies pork barrel reformin modern u s history there have been two major attempts to limit pork barrel politics | |
what does the pork barrel represent | prior the advent of refrigeration pork barrels were literal barrels made of wood which preserved salted pork today the term has become an emblem of wasteful government spending | |
what is an example of pork barrel | one of the most infamous and commonly cited examples of pork barrel spending is a proposed 400 million bridge which would have connected the town of ketchika alaska with gravina island where there was located an airport elected officials from alaska were vocal proponents of the proposal but it was held up as an egregious example of a pork barrel project and eventually scrapped 5 | |
how much has been spent on pork barrel projects | it s challenging to estimate the amount that has been spent on pork barrel projects because the term isn t officially defined nor do all forms of wasteful spending get classified as pork barrel spending according to cagw the fiscal year 2022 saw 7 396 earmarks costing around 26 1 billion 6 this is just one organization s estimate and not necessarily definitive the bottom linepork barrel politics refers to a practice in which elected officials secure funding for local infrastructure or projects that benefit their constituents commonly in exchange for political support these projects may be slipped into bigger bills that have little do with the local initiatives pork barrel projects have been criticized as wasteful there have been attempts to reign it in though fiscally conservative critics argue that it remains an issue | |
what is the porter diamond model | the porter diamond theory of national advantage or the porter diamond model is a model that describes the competitive advantage that nations or groups possess based on factors available to them the theory explains how governments can act to improve a country s position in a globally competitive economic environment created by michael porter founder of the institute for strategy and competitiveness at the harvard business school the porter diamond model is considered a proactive economic theory 1understanding the porter diamond modelthe porter diamond model suggests that countries can create advantages for themselves such as a strong technology industry or a skilled labor force another application of the porter diamond model is used in corporate strategy as a framework to analyze the relative merits of investing and operating in national markets 2the porter diamond model is visually represented by a diagram that resembles the points of a diamond and includes the interrelated determinants that porter theorizes as the deciding factors of national comparative economic advantage harvard business school professor michael e porter created the porter diamond model and porter s five forces points on the porter diamond modelfirm strategy structure and rivalry define that competition leads to increased production and the development of technological innovations the concentration of market power degree of competition and ability of rival firms to enter a nation s market are influential 2related supporting industries consider the upstream and downstream industries that facilitate innovation through exchanging ideas these can spur innovation depending on the degree of transparency and knowledge transfer demand conditions refer to the size and nature of the customer base for products which also drives innovation and product improvement larger consumer markets will demand and stimulate a need to differentiate and innovate and increase market scale for businesses 2according to porter the most important of the five points is factor conditions factor conditions are those elements that porter believes a country s economy can create for itself such as a large pool of skilled labor technological innovation infrastructure and capital one way for the government to accomplish that goal is to stimulate competition between domestic companies by establishing and enforcing anti trust laws 2 | |
why does the porter diamond model consider factor conditions as most important | the porter diamond model purports that a country s economy can create skilled labor technological innovation infrastructure and capital and these factors outweigh naturally inherited factors such as land and natural resources | |
how have countries developed factor conditions to create a better economy | japan has developed a competitive global economic presence beyond the country s inherent resources by producing a large number of engineers that have helped drive technological innovation in japanese industries 2 | |
how can the porter diamond model help businesses improve | the theory helps businesses understand why certain industries are widespread in some nations companies can then analyze and compare their position in the market and implement strategies to compete | |
what is porter s five forces model | similar to the porter diamond model porter s five forces model of business strategy identifies and analyzes five competitive forces that shape every industry and help determine an industry s weaknesses and strengths the bottom linethe porter diamond model explains the factors that provide a competitive advantage for one national economy or business over another the points of the theory resembling a diamond include the firm strategy structure and rivalry related industries demand conditions and factor conditions the model can be used by businesses to guide and shape strategies regarding investing and operating in national markets | |
what are porter s five forces | michael porter s five force strategic analysis model introduced in a 1979 article published in the harvard business review remains a fundamental tool for strategic analysts plotting the competitive landscape of an industry 1in a bid to mirror the complexity real strategists would face while keeping their strategic analysis manageable porter set out five forces at play in a given industry internal competition the potential for new entrants the negotiating power of suppliers the negotiating power of customers and the ability of customers to find substitutes below we take you through each of porter s five forces detail the significant critiques of his approach and show how to apply the model to specific markets investopedia xiaojie liuunderstanding porter s five forcesstrategic analysis at the time of porter s article tended not only to love acronyms swot pest pestel bcg matrix etps etc but also models focused on the internal dynamics of individual companies 2while it would be unfair to suggest they ignored the competitive environment companies face they were typically vague while doing so e g the opportunities and threats of swot analysis were too macro for many dealing with the challenges of specific industries porter s 1979 article was also a broadside against the theoretical models found in the curriculums of the major business schools where future strategists dealt with a perfectly competitive market characterized by equilibrium and no specific firm influencing prices a model they were unlikely to find in the real world the first sentence of porter s 1979 article could hardly be less controversial the essence of strategy formulation is coping with competition 1it s the following sentence that in its understated way would prove far more consequential yet it is easy to view competition too narrowly and too pessimistically 1rather than viewing competition narrowly as rivalry among existing competitors which is his first force porter expanded the concept to include four others the bargaining power of suppliers and buyers the threat of new entrants and the threat of substitute products or services let s take these in turn subscribe to term of the day and learn a new financial term every day stay informed and make smart financial decisions sign up now porter s five forcesporter s first force is what we usually mean when discussing business competition we think of pepsi and coca cola for soft drinks apple and samsung for smartphones nike and adidas for sneakers and ford and general motors for autos indeed some of these rivalries are so influential that consumers split almost culturally among those who have an iphone drive a ford or prefer netflix to hulu thus it s no accident that we also consider business competition chiefly a war among rivals such rivalries can lead to price wars high priced marketing battles and races for slight advances that could mean a competitive advantage these tactics can stimulate companies to make ever better products but also erode profits and market stability 3several factors contribute to the intensity of competitive rivalry in an industry industries where new firms can enter more easily almost always have lower profit margins and the firms involved each have less market share 1the sector for local restaurants has relatively low entry requirements there aren t significant investments or regulatory hurdles to surmount before opening to the public thus it s also the case that your favorite restaurant may not stay open for long given the hypercompetitive environment and constant entrance of new restaurants opening here are factors in measuring how much new entrants threaten an industry suppliers are powerful when they are the only source of something important that a firm needs can differentiate their product or have strong brands 1 | |
when customers have more strength they can exert pressure on businesses to provide better products or services at lower prices this force intensifies under certain conditions | porter chose the metaphor of forces because they aren t static so business must constantly adjust their strategies as forces in an industry change | |
when customers can find substitutes for a sector s services that s a major threat to the companies in that industry 2 | here are some ways that this threat can be magnified competitive measures | |
when published michael porter s framework marked a departure from the then dominant models of business strategy steeped in classic competition theory 4 | those models still echoed in economics 101 textbooks rested on several key if questionable assumptions markets as arenas for many small firms with no significant market power homogeneous products perfect information symmetry and no barriers to market entry or exit while helpful for learning basic principles this idealized view could be taken to an extreme when strategizing with neatly constructed supply and demand curves assuming for instance new market entrants would stabilize rising prices by increasing supply business strategists need to deal with sectors where information asymmetry product differentiation and significant entry and exit barriers are common firms do have some control over prices contradicting classical assumptions in short where economists assumed most markets acted like the model for porter most firms are in industries with entrenched interests and different supplier and customer relations they need strategies for dealing with anything but perfect competition 5porter s five forces come together in different ways for any given sector he labeled industry competition as ranging from intense to mild with profits harder to achieve as the intensity in a sector rises in intensely competitive industries all or most of the five forces have a strong influence 1the fast food industry is porter s own example which still remains the case 1in this sector there s a fierce rivalry among established players like mcdonald s and burger king high bargaining power for suppliers and customers and a relentless threat of new entrants and substitutes all of which means profits are constantly getting squeezed for anyone in the sector meanwhile in mild industries such as commercial aircraft manufacturing there are weaker forces here low supplier bargaining power a minimal threat of new entrants and a lack of direct substitutes like commercial aircraft for long distance travel help form a sector more conducive to higher profits applying the modelsince his 1979 harvard business review article porter has published many books on strategic analysis including works where he has expanded on his five force model he s also become very concise in providing the specific steps in performing an industry analysis 3critiques of the five forcesporter s model helped reframe the understanding of competition it wasn t confined to direct rivals but extended to suppliers and customers traditionally viewed in a transactional light suppliers especially those with unique resources or enjoying a monopoly could dictate terms lower profits or in extreme cases forward integrate into the buyer s industry customers too wield power especially when buying in bulk or when they can just go elsewhere quickly or choose to bypass companies for in house products 2but the model has its pitfalls for example many have critiqued the model s emphasis on sector affiliation porter concentrates on industry wide forces which can sideline an individual company s unique strategies and advantages this industry centric view may not fully capture how distinct company characteristics can change the game not just play within an industry s preset rules 6the model assumes clear lines among sectors which may not be tenable given the increasingly blurred lines in today s business world where companies are simultaneously in several sectors industries are no longer isolated silos instead they often intersect and interact leading to a far more complex environment than the model suggests 4porter s five force model has also been critiqued for not adequately addressing the role of partnerships and collaboration 6while porter certainly entertained a competitive model where rivalry wasn t just a war to the death the problem is that he didn t go far enough in an interconnected global economy alliances and cooperative strategies are often as pivotal to success as having a competitive advantage a factor that the model doesn t explicitly consider another critique that can be filed under going in the right direction but not far enough is that the model is too static and fails to account for industries with rapid changes in technology and consumer preferences while effective in stable sectors critics say it doesn t apply well to industries marked by fast paced innovation and shifting demand 2most strikingly porter s model generalizes competition implying a seemingly uniform industry structure for every market 2this might overlook the unique competitive scenarios in different sectors and the increasing importance of the nontraditional strategies involved in digital transformation and platform based competition | |
how does porter s five forces differ from swot analysis | both are strategic planning tools but they serve different purposes the five force model analyzes the competitive environment of an industry looking at its intensity and the bargaining power of suppliers and customers swot analysis meanwhile is broader and assesses a company s internal strengths and weaknesses as well as its external opportunities and threats it can assist in strategic planning by pinpointing areas where the company excels and faces obstacles helping to align the company s strategy with its internal resources and prospects in the market while mitigating its vulnerabilities and external challenges | |
how can porter s five forces address the effects of globalization on an industry | porter s model has been used to analyze how globalization affects industry competition for instance globalization lowers barriers to entry in specific industries intensifying the threat of new entrants from different regions 2it can also expand the pool of potential substitutes and alter the power dynamics with suppliers and customers worldwide while porter and others were doing this analysis for industries facing global competition decades ago it s still applicable to sectors undergoing this process in the 2020s | |
how does porter s five forces model apply to the ai sector | using the model we would begin by looking at the competitive rivalry the ai sector is marked by high competition with key players ranging from tech giants to small startups rapid advances mean companies have to move quickly simply to maintain relevance we would then need to gauge the power of suppliers of data sets and specialized hardware which have ample power since ai firms rely heavily on these resources moving to consumers we would need to review the needs of individual consumers and whether larger companies can force ai firms to negotiate better services and prices for them the field of ai has been attracting many new entrants but there are significant barriers to entry including high initial research and development costs lastly the threat from the last force the possibility of substitutes depends on what a firm wants to do with its ai based technology the more complicated the tasks the ai is given the more likely other goods and services can t substitute for it the bottom lineporter s five forces model sets out essential criteria for considering a company s competitive landscape the power of suppliers and buyers the threat of new entrants and substitutes and competitive rivalry while the economic terrain has evolved significantly since the 1970s and porter has updated his work ever since the principles underlying porter s model remain current it s still the case that companies don t rise and fall on their portfolio of products alone but are jockeying with others in industries that have their own logic and structural forces at play today while the five forces model may require adapting it to rapid technological change and the importance of collaboration across many industries it s a reliable way to help guide companies needing to navigate industry specific challenges in their competitive strategy | |
what is a portfolio investment | a portfolio investment is ownership of a stock bond or other financial asset with the expectation that it will earn a return or grow in value over time or both it entails passive or hands off ownership of assets as opposed to direct investment which would involve an active management role portfolio investment may be divided into two main categories understanding portfolio investmentthe term portfolio investments covers a wide range of asset classes including stocks government bonds corporate bonds real estate investment trusts reits mutual funds exchange traded funds etfs and bank certificates of deposit portfolio investments can also include more esoteric choices including options and derivatives such as warrants and futures there also are physical investments such as real estate commodities art land timber and gold in fact a portfolio investment can be any possession that is purchased for the purpose of generating a return in the short or long term the composition of investments in a portfolio depends on a number of factors the most important are the investor s tolerance for risk and investment horizon is the investor a young professional with children a mature person looking forward to retirement or a retiree looking for a reliable income supplement those with a greater risk tolerance may favor investments in growth stocks real estate international securities and options while more conservative investors may opt for government bonds and blue chip stocks a portfolio investment can be anything from a stock or a mutual fund to real estate or art on a larger scale mutual funds and institutional investors are in the business of making portfolio investments for the largest institutional investors such as pension funds and sovereign funds this may include infrastructure assets like bridges and toll roads portfolio investments by institutional investors generally are held for the long term and are relatively conservative pension funds and college endowment funds are not invested in speculative stocks investors saving for retirement are often advised to focus on a diversified mix of low cost investments for their portfolios index funds have become popular in individual retirement accounts iras and 401 k accounts due to their broad exposure to a number of asset classes at a minimum expense level these types of funds make ideal core holdings in retirement portfolios those who want a more hands on approach may tweak their portfolio allocations by adding additional asset classes such as real estate private equity and individual stocks and bonds to the portfolio mix | |
portfolio management is the art of selecting and overseeing a group of investments that meet the long term financial objectives and risk tolerance of a client a company or an institution | some individuals do their own investment portfolio management this requires an in depth understanding of the key elements of portfolio building and maintenance that make for success including asset allocation diversification and rebalancing understanding portfolio managementprofessional licensed portfolio managers work on behalf of clients while individuals may choose to build and manage their own portfolios in either case the portfolio manager s ultimate goal is to maximize the investments expected return within an appropriate level of risk exposure portfolio management requires the ability to weigh the strengths and weaknesses opportunities and threats of a spectrum of investments the choices involve trade offs from debt versus equity to domestic versus international and growth versus safety who uses portfolio managementportfolio management is a critical investment practice used by two types of entities individual and institutional investors these categories have distinct strategies goals and resources understanding the different approaches and needs of these two types of investors can provide greater insight into how portfolio management techniques are applied across the financial spectrum individual investors often focus on personal wealth and future needs managing smaller amounts of money with varying degrees of professional assistance in contrast institutional investors manage large scale assets with a professional approach tailored to fulfill specific financial obligations and institutional goals both groups however aim to improve their returns through effective portfolio management tailored to their specific circumstances and financial objectives individual investors have a range of personal goals risk preferences and resources their objectives include saving for retirement accumulating wealth for large purchases funding education for children or building an emergency fund each goal requires a different strategy or risk profile the risk tolerance as well as investment knowledge among individual investors varies greatly in addition their approach to managing investments can range from highly engaged active trading and rebalancing to relying on automated or professional management as financial markets have evolved and technology has widened access to investment information individual investors have had wider prospects to tailor their investment strategies to meet their personal financial objectives institutional investors are entities that pool large sums of money and invest those funds into various financial instruments and assets pension funds endowments foundations banks and insurance companies each has specific objectives and constraints that influence their portfolio management strategies many institutional investors have long term financial obligations that cause them to focus on long term growth and sustainability over short term gains in addition institutional investors are often under strict regulatory oversight to ensure they manage their beneficiaries funds responsibly moreover ethical and social governance issues increasingly influence their investment decisions risk management is a crucial part of the work of an institutional portfolio manager since these entities must balance the need for profitability with the imperative of preserving capital to meet future liabilities institutional investors investment approaches are typically conservative compared with individual investors focusing on long term stability capital preservation and meeting future obligations indeed each type of institutional investor has distinct strategies and objectives but all share the common goal of responsibly managing large pools of capital to meet the needs of their stakeholders passive vs active managementportfolio management can be either passive or active approach hands oncost implications more costlyperformance historically over long periods underperformsapproach hands offcost implications less costlyperformance historically over long periods market performspassive management is the set it and forget it long term strategy it may involve investing in one or more exchange traded etf index funds this is commonly referred to as indexing or index investing those who build indexed portfolios may use modern portfolio theory to help them optimize the mix active management involves attempting to beat the performance of an index by actively buying and selling individual stocks and other assets closed end funds are generally actively managed as are many mutual funds active managers may use any of a wide range of quantitative or qualitative models to aid in their evaluation of potential investments investors who use an active management approach have fund managers or brokers to buy and sell stocks in an attempt to outperform a specific index such as the standard poor s 500 index or the russell 1000 index often these investors will also use portfolio management software to help them track their investments an actively managed investment fund has an individual portfolio manager co managers or a team of managers actively making investment decisions for the fund the success of an actively managed fund depends on a combination of in depth research market forecasting and the expertise of the portfolio manager or management team portfolio managers engaged in active investing pay close attention to market trends shifts in the economy changes to the political landscape and news that affects companies this data is used to time the purchase or sale of investments to take advantage of market irregularities active managers claim that these processes will boost the potential for returns higher than those achieved by simply tracking the holdings on a particular index trying to beat the market inevitably involves market risk indexing eliminates this particular risk as there is less probability of human error in selecting the index stocks index funds are also traded less often which means that they incur lower expense ratios and are more tax efficient than actively managed funds passive portfolio management also referred to as index fund management aims to duplicate the return of a particular market index or benchmark managers buy the same stocks that are listed on the index using the same weighting that they represent in the index a passive strategy portfolio can be structured as an etf a mutual fund or a unit investment trust index funds are branded as passively managed because each has a portfolio manager whose job is to replicate the index rather than select the assets bought or sold management fees assessed on passive portfolios or funds are typically far lower than active management strategies discretionary vs non discretionary managementanother critical element of portfolio management is the concept of discretionary and non discretionary management this portfolio management approach dictates what a third party may be allowed to do regarding your portfolio a discretionary or non discretionary management style is only relevant if you have an independent broker managing your portfolio if you want the broker to execute trades that you have explicitly approved you must opt for a non discretionary investment account the broker may advise you on strategy and suggest investment moves however without your approval the broker is simply an advisor who must follow your instructions meanwhile some investors would prefer placing all the decisions in the hands of their broker or financial manager in these situations the financial advisor can buy or sell securities without the approval of the investor the advisor still has a fiduciary responsibility to act in their client s best interest when managing their portfolio key elements of portfolio managementthe key to effective portfolio management is the long term mix of assets generally that means stocks bonds and cash equivalents such as certificates of deposit there are others called alternative investments such as real estate commodities derivatives and cryptocurrency asset allocation is based on the understanding that different types of assets do not move in concert and some are more volatile than others a mix of assets provides balance and protects against risk investors with a more aggressive profile weigh their portfolios more toward volatile investments such as growth stocks investors with a conservative profile weigh their portfolios toward stabler investments such as bonds and blue chip stocks rebalancing captures recent gains and opens new prospects while keeping the portfolio in line with its original risk return profile the only certainty in investing is that it is impossible to always predict winners and losers the prudent approach is to create a basket of investments that provide broad exposure across different assets diversification involves spreading the risk and reward of individual securities within an asset class or between asset classes because it is difficult to know which subset of an asset class or sector is likely to outperform another diversification seeks to capture the returns of different sectors over time while reducing volatility real diversification is made across various classes of securities sectors of the economy and geographical regions rebalancing returns a portfolio to its original target allocation at regular intervals usually annually this is done to reinstate the original asset mix when the market movements push it out of kilter for example a portfolio that starts with a 70 equity and 30 fixed income allocation could after an extended market rally shift to an 80 20 allocation investors have made a good profit but the portfolio now has more risk than investors with that balance can tolerate rebalancing generally involves selling high priced securities and putting that money to work in lower priced and out of favor securities the annual rebalancing exercise allows investors to capture gains and expand their chances for growth in high potential sectors while keeping the portfolio aligned with the original risk return profile a potentially material aspect of portfolio management relates to how your portfolio is shaped to minimize taxes in the long term this is relevant for retirement accounts how long securities are held on for and which securities are held for example certain bonds may be tax exempt this means that any dividends earned are not subject to taxes meanwhile consider how the irs had different rules relating to short term or long term capital gains taxes for individuals earning less than 41 675 in 2023 their capital gains rate may be 0 meanwhile a short term capital gains tax of 15 may apply if your income is above this irs limit portfolios include investments across cash accounts 401 k s iras and other retirement accounts common portfolio management strategiesevery investor s specific situation is unique therefore while some investors may be risk averse others may be inclined to pursue the greatest returns while also incurring the greatest risk very broadly speaking here are several common portfolio management strategies an investor can consider challenges of portfolio managementwhatever strategy is chosen portfolio management always faces several hurdles that often cannot be eliminated entirely even if an investor has a foolproof portfolio management strategy investment portfolios are subject to market fluctuations and volatility the best management approach can still suffer from significant losses though diversification is an important aspect of portfolio management it can also be challenging to achieve finding the right mix of asset classes and investments to balance risk and return requires an in depth understanding of the market and the investor s risk tolerance it may also be expensive to buy a wide range of securities to meet the desired diversification to devise the best portfolio management strategy an investor must first know their risk tolerance investment horizon and return expectations this requires a clear short term and long term goal because life circumstances can quickly and rapidly change investors must be mindful of how some strategies limit investment liquidity or flexibility in addition the irs may implement changes to tax regulations that may force you to change your investment strategy lastly portfolio managers charge fees the portfolio manager must often meet specific regulatory reporting requirements and managers may not have the same views of the market as you do | |
how do i determine my risk tolerance | determining your risk tolerance involves assessing your willingness and ability to endure market volatility and potential losses this can be influenced by your financial goals investment time horizon income and personal comfort with risk tools like risk tolerance questionnaires can help quantify your risk tolerance by asking about your reactions to hypothetical market scenarios and your investment preferences in addition thinking back to your past investment experiences and consulting with a financial advisor can provide a clearer understanding of the kinds of investments that are right for you in terms of your risk tolerance | |
what is asset allocation | asset allocation involves spreading the investor s money among different asset classes so that risks are reduced and opportunities are maximized stocks bonds and cash are the three most common asset classes but others include real estate commodities currencies and crypto within each of these are subclasses that play into a portfolio allocation | |
what should i do if my portfolio has significant losses | if this happens it s important to avoid panic selling and instead assess the situation calmly start by reviewing your investment strategy to ensure it still aligns with your long term goals and risk tolerance consider whether the losses are because of market volatility or fundamental changes in the assets you hold rebalancing your portfolio might be necessary to maintain your desired asset allocation diversifying your investments can also help mitigate future risks consulting with a financial advisor can give you guidance and help you make informed decisions about how to recover from your losses and adjust your strategy if needed | |
how do i evaluate how my portfolio is doing | evaluating the performance of your portfolio involves comparing its returns against benchmarks typically indexes that offer a mix like you re aiming for in your portfolio and considering your investment goals data to review include total return your risk adjusted return and the performance of individual assets relative to their respective indexes it s also important to review the consistency of your returns over time and whether your portfolio is making progress toward your objectives the bottom lineanyone who wants to grow their money has choices to make you can be your own investment portfolio manager or you can hire a professional to do it for you you can choose a passive management strategy by putting your money in index funds you can also try to beat the markets by actively managing your portfolio you ll want to pay attention to the basics of portfolio management pick a mix of assets to lower your overall risk diversify your holdings to maximize your potential returns and rebalance your portfolio regularly to keep the mix right | |
what is a portfolio manager | the term portfolio manager refers to a financial professional who makes investment decisions for individual and or institutional investors portfolio managers develop and implement investment strategies and manage the day to day trading of a portfolio these professionals may be responsible for managing an individual investor s assets or those of an institutional fund such as a mutual fund investors should consider the track record of portfolio managers when investing in funds duties and responsibilitiesas noted above a portfolio manager is responsible for making investment decisions about the assets of individual investors and of various funds including mutual funds exchange traded funds etfs and closed end funds to name a few managers do this by creating and implementing various investment strategies including buy and hold value investing indexing diversification income investing small cap contrarian investing active investing and passive investing portfolio managers construct and manage investment or financial portfolios based on their investment style the goal is to minimize losses while maximizing returns this requires conducting research making adjustments to these portfolios through rebalancing at regular intervals and communicating with investors a portfolio manager holds great influence on a fund whether it s a closed or open ended fund hedge fund venture capital fund or etf decisions made by the portfolio manager will directly affect the fund s returns portfolio managers are or should usually be experienced investors brokers or traders with strong backgrounds in financial management and track records of sustained success portfolio managers may find themselves doing research as associates directing investment teams at the mid senior level or working with individual clients for private wealth management firms senior managers commonly work with the chief investment officers cios of their funds 1 depending on where they work portfolio managers may be compensated with a base salary commissions and bonuses portfolio management can be active or passive and historical performance records indicate that only a minority of active fund managers consistently beat the market 2types of portfolio managersregardless of their educational or professional background portfolio managers generally fall into one of two categories active or passive portfolio managers we highlight the difference between the two belowmost portfolio managers have at least an undergraduate degree in finance or another related field they may also hold additional certifications such as the chartered financial analyst cfa and or the certified financial planner cfp designations many managers also get licensed by the financial industry regulatory authority finra | |
what makes a good portfolio manager | regardless of the investment approach all portfolio managers need to have very specific qualities to be successful the first is ideation if the portfolio manager is active then the ability to have original investment insight is paramount if the manager takes a passive approach the originating insight comes in the form of the market index they ve decided to mirror passive managers must make smart choices about the index the way a portfolio manager conducts research is very important other key characteristics that portfolio managers should possess include communication skills the ability to work independently and with others especially when they work with other managers and risk management | |
how much do portfolio managers earn | a portfolio manager s salary depends entirely on several factors including the company they work for the city location where they work their experience and the type of portfolio they manage according to glassdoor the average base pay for a portfolio manager ranges from 88 000 to 149 000 per year their take home pay may increase if they meet their annual goals 3 portfolio managers are included under the financial managers category in the handbook for the bureau of labor statistics bls the median salary for these professionals in 2023 was 156 100 per year 4 | |
how are portfolio managers compensated | portfolio managers often receive a base salary this figure depends on the company they work for the geographic location and their experience among other factors in some cases these professionals may also get additional compensation including bonuses commissions benefits and stock options | |
what skills do you need to become a portfolio manager | portfolio managers need a range of skills to be successful including communication research and analytical skills risk management portfolio construction and the ability to work independently and with others the bottom lineit s important for investors to do their research when it comes to making key decisions about their financial future make sure you research any potential assets but also portfolio managers a few key things you should look out for when reviewing these financial professionals include their experience the fees they charge and their investment styles and philsophy | |
a portfolio is a collection of financial investments like stocks bonds commodities cash and cash equivalents including closed end funds and exchange traded funds etfs | people generally believe that stocks bonds and cash comprise the core of a portfolio though this is often the case it does not need to be the rule a portfolio may contain a wide range of assets including real estate art and private investments you may choose to hold and manage your portfolio yourself or you may allow a money manager financial advisor or another finance professional to manage your portfolio understanding financial portfoliosone of the key concepts in portfolio management is the wisdom of diversification which simply means not putting all of your eggs in one basket 1 diversification tries to reduce risk by allocating investments among various financial instruments industries and other categories it aims to maximize returns by investing in different areas that would each react differently to the same event there are many ways to diversify | |
how you choose to do it is up to you your goals for the future your appetite for risk and your personality are all factors in deciding how to build your portfolio | regardless of your portfolio s asset mix all portfolios should contain some degree of diversification and reflect the investor s tolerance for risk return objectives time horizon and other pertinent constraints including tax position liquidity needs legal situations and unique circumstances the word portfolio comes from the latin folium meaning to carry leaves as in papers stock and bond certificates were once only issued in paper form from which this terminology was adopted portfolio is also used to describe an artist s collection of works for similar reasons 2managing a portfolioyou can think of an investment portfolio as a pie that has been divided into pieces of varying wedge shaped sizes each piece representing a different asset class and type of investment investors aim to construct a well diversified portfolio to achieve a risk return portfolio allocation that is appropriate for their level of risk tolerance 1 although stocks bonds and cash are generally viewed as a portfolio s core building blocks you may grow a portfolio with many different types of assets including real estate gold stocks various types of bonds paintings and other art collectibles carla tardi investopediathe sample portfolio allocation pictured above is for an investor with a low tolerance for risk in general a conservative strategy tries to protect a portfolio s value by investing in lower risk securities in the example you ll see that a full 50 is allocated to bonds which might contain high grade corporates and government bonds including municipals munis the 20 stock allocation could comprise blue chip or large cap equities and 30 of short term investments might include cash certificates of deposit cds and high yield savings accounts most investment professionals agree that though it does not guarantee against loss diversification is a key component for reaching long range financial goals while minimizing risk types of portfoliosthere can be as many different types of portfolios and portfolio strategies as there are investors and money managers you also may choose to have multiple portfolios whose contents could reflect a different strategy or investment scenario structured for a different need hybrid portfoliothe hybrid portfolio approach diversifies across asset classes building a hybrid portfolio requires taking positions in stocks as well as bonds commodities real estate and even art generally a hybrid portfolio entails relatively fixed proportions of stocks bonds and alternative investments this is beneficial because historically stocks bonds and alternatives have exhibited less than perfect correlations with one another portfolio investment | |
when you use a portfolio for investment purposes you expect that the stock bond or another financial asset will earn a return or grow in value over time or both a portfolio investment may be either strategic where you buy financial assets with the intention of holding onto those assets for a long time or tactical where you actively buy and sell the asset hoping to achieve short term gains | aggressive equities focused portfoliothe underlying assets in an aggressive portfolio generally would assume great risks in search of great returns aggressive investors seek out companies that are in the early stages of their growth and have a unique value proposition most of them are not yet common household names defensive equities focused portfolioa portfolio that is defensive would tend to focus on consumer staples that are impervious to downturns defensive stocks do well in bad times as well as good times no matter how bad the economy is at a given time companies that make products that are essential to everyday life will survive income focused equities portfoliothis type of portfolio makes money from dividend paying stocks or other types of distributions to stakeholders some of the stocks in the income portfolio could also fit in the defensive portfolio but here they are selected primarily for their high yields an income portfolio should generate positive cash flow real estate investment trusts reits are examples of income producing investments speculative equities focused portfolioa speculative portfolio is best for investors who have a high level of tolerance for risk speculative plays could include initial public offerings ipos or stocks that are rumored to be takeover targets technology or healthcare firms in the process of developing a single breakthrough product also would fall into this category although a financial advisor can create a generic portfolio model for an individual an investor s risk tolerance should significantly reflect the portfolio s content time horizon and portfolio allocationsimilar to risk tolerance investors should consider how long they have to invest when building a portfolio in general investors should move toward a conservative asset allocation as their goal date approaches to protect the portfolio s earnings up to that point for example a conservative investor might favor a portfolio with large cap value stocks broad based market index funds investment grade bonds and a position in liquid high grade cash equivalents for example take an investor saving for retirement who s planning to leave the workforce in five years even if that investor is comfortable investing in stocks and riskier securities they might want to invest a larger portion of the portfolio in more conservative assets such as bonds and cash to help protect what has already been saved conversely an individual just entering the workforce may want to invest their entire portfolio in stocks as they may have decades to invest and the ability to ride out some of the market s short term volatility | |
how do you create a financial portfolio | building an investment portfolio requires more effort than the passive index investing approach first you need to identify your goals risk tolerance and time horizon then research and select stocks or other investments that fit within those parameters regular monitoring and updating are often required along with entry and exit points for each position rebalancing requires selling some holdings and buying more of others so that most of the time your portfolio s asset allocation matches your strategy risk tolerance and desired level of returns despite the extra effort required defining and building a portfolio can increase your investing confidence and give you control over your finances | |
what does a good portfolio look like | a good portfolio will depend on your investment style goals risk tolerance and time horizon generally speaking a good degree of diversification is recommended regardless of the portfolio type in order to not hold all of your eggs in one basket | |
how do you measure a portfolio s risk | a portfolio s standard deviation of returns or variance is often used as a proxy of overall portfolio risk the standard deviation calculation is not merely a weighted average of the individual assets standard deviations it must also account for the co variance among the different holdings for a two asset portfolio the standard deviation calculation is p w12 12 w22 22 2w1w2cov1 2 1 2the bottom linea portfolio is a cornerstone of investing in the markets a portfolio is composed of the various positions in stocks bonds and other assets held and is viewed as one cohesive unit the portfolio components therefore must work together to serve the investor s financial goals constrained by their risk tolerance and time horizon portfolios can be constructed to achieve various strategies from index replication to income generation to capital preservation regardless of the strategy diversification is seen as a good way to reduce risk without sacrificing the portfolio s expected return | |
what is portfolio runoff | portfolio runoff means assets with a finite term are not replaced as they mature | |
when the principal invested in a fixed income security with a set maturity is repaid the investor must decide whether to reinvest it when the proceeds from matured bonds are not reinvested a portfolio can be said to be in runoff | balance sheet runofffor a bank or lender portfolio runoff can occur if it can t make new loans quickly enough to replace the repaid ones it made previously runoff can also occur when early prepayments are allowed or as defaults occur banks can experience runoff when individuals and businesses withdraw capital to invest in other higher paying investments thereby reducing the bank s total capital in an effort to reduce portfolio runoff some loans specify prepayment penalties these provide additional compensation for the lender if the borrower pays off a loan before the end of its term runoff in investment portfoliosfixed income investments like asset backed securities abs and mortgage backed securities mbs usually have a fixed maturity date for mbs it would be based on the term of mortgages bundled to make up the security if cash flow from mortgage backed securities is not reinvested the income the portfolio generates will decline federal reserve actionsthe federal reserve bought treasury debt and mortgage backed securities in quantitative easing qe programs adopted following the 2008 financial crisis to start reducing its balance sheet the fed doesn t need to sell those securities it can merely choose not to reinvest some or all of the proceeds as the debt matures and is repaid insurance portfolio runoffjust as a fixed income investor may choose not to reinvest coupon payments or principal repayments a reinsurer may choose not to write new policies while waiting for those it previously wrote to expire its portfolio would then be in runoff | |
what is portfolio turnover | portfolio turnover is a measure of how frequently assets within a fund are bought and sold by the managers portfolio turnover is calculated by taking either the total amount of new securities purchased or the number of securities sold whichever is less over a particular period divided by the total net asset value nav of the fund the measurement is usually reported for a 12 month time period understanding portfolio turnoverthe portfolio turnover measurement should be considered by an investor before deciding to purchase a given mutual fund or similar financial instrument that s because a fund with a high turnover rate will incur more transaction costs than a fund with a lower rate unless the superior asset selection renders benefits that offset the added transaction costs a less active trading posture may generate higher fund returns in addition cost conscious fund investors should take note that the transactional brokerage fee costs are not included in the calculation of a fund s operating expense ratio and thus represent what can be in high turnover portfolios a significant additional expense that reduces investment return the turnover rate a very actively managed fund might generate reflecting the fact that the fund s holdings are 100 different from what they were a year ago managed funds vs unmanaged fundsthe debate continues between advocates of unmanaged funds such as index funds and managed funds s p dow jones indices which publishes regular research on how actively managed funds perform compared to the s p 500 index claims that 75 of large cap active funds underperformed the s p 500 in the five years leading up to dec 31 2020 meanwhile in 2015 a separate morningstar study concluded that index funds outperformed large company growth funds about 68 of the time in the 10 year period ending dec 31 2014 unmanaged funds traditionally have low portfolio turnover funds such as the vanguard 500 index fund mirror the holdings of the s p 500 whose components infrequently are removed the fund registered a portfolio turnover rate of 4 in 2020 2019 and 2018 with minimal trading and transaction fees helping to keep expense ratios low some investors avoid high cost funds at all costs by doing so there exists the possibility that they may miss out on superior returns not all active funds are the same and a handful of fund houses and managers actually make a habit out of consistently beating their benchmarks after accounting for fees often the most successful active fund managers are those who keep costs down by making few tweaks to their portfolio and simply buying and holding however there have also been a few cases where aggressive managers have made regularly chopping and changing pay off portfolio turnover is determined by taking what the fund has sold or bought whichever number is less and dividing it by the fund s average monthly assets for the year taxes and turnoverportfolios that turn over at high rates generate large capital gains distributions investors focused on after tax returns may be adversely affected by taxes levied against realized gains consider an investor that continually pays an annual tax rate of 30 on distributions made from a mutual fund earning 10 per year the individual is foregoing investment dollars that could be retained from participation in low transactional funds with a low turnover rate an investor in an unmanaged fund that sees an identical 10 annual return does so largely from unrealized appreciation index funds should not have a turnover rate higher than 20 to 30 since securities should only be added or removed from the fund when the underlying index makes a change in its holdings a rate higher than 30 suggests the fund is poorly managed example of portfolio turnoverif a portfolio begins one year at 10 000 and ends the year at 12 000 determine the average monthly assets by adding the two together and dividing by two to get 11 000 next assume the various purchases totaled 1 000 and the various sales totaled 500 finally divide the smaller amount buys or sales by the average amount of the portfolio for this example the sales represent a smaller amount therefore divide the 500 sales amount by 11 000 to get the portfolio turnover in this case the portfolio turnover is 4 54 | |
what is portfolio variance | portfolio variance is a measurement of risk of how the aggregate actual returns of a set of securities making up a portfolio fluctuate over time this portfolio variance statistic is calculated using the standard deviations of each security in the portfolio as well as the correlations of each security pair in the portfolio investopedia theresa chiechiunderstanding portfolio varianceportfolio variance looks at the co variance or correlation co efficients for the securities in a portfolio generally a lower correlation between securities in a portfolio results in a lower portfolio variance portfolio variance is calculated by multiplying the squared weight of each security by its corresponding variance and adding twice the weighted average weight multiplied by the co variance of all individual security pairs modern portfolio theory says that portfolio variance can be reduced by choosing asset classes with a low or negative correlation such as stocks and bonds where the variance or standard deviation of the portfolio is the x axis of the efficient frontier formula and calculation of portfolio variancethe most important quality of portfolio variance is that its value is a weighted combination of the individual variances of each of the assets adjusted by their co variances this means that the overall portfolio variance is lower than a simple weighted average of the individual variances of the stocks in the portfolio the formula for portfolio variance in a two asset portfolio is as follows | |
where | the portfolio variance is equivalent to the portfolio standard deviation squared as the number of assets in the portfolio grows the terms in the formula for variance increase exponentially for example a three asset portfolio has six terms in the variance calculation while a five asset portfolio has 15 using software like excel can make the calculation of these numbers easier portfolio variance and modern portfolio theorymodern portfolio theory mpt is a framework for constructing an investment portfolio mpt takes as its central premise the idea that rational investors want to maximize returns while also minimizing risk sometimes measured using volatility investors seek what is called an efficient frontier or the lowest level of risk and volatility at which a target return can be achieved risk is lowered in mpt portfolios by investing in non correlated assets assets that might be risky on their own can actually lower the overall risk of a portfolio by introducing an investment that will rise when other investments fall this reduced correlation can reduce the variance of a theoretical portfolio in this sense an individual investment s return is less important than its overall contribution to the portfolio in terms of risk return and diversification the level of risk in a portfolio is often measured using standard deviation which is calculated as the square root of the variance if data points are far away from the mean then the variance is high and the overall level of risk in the portfolio is high as well standard deviation is a key measure of risk used by portfolio managers financial advisors and institutional investors asset managers routinely include standard deviation in their performance reports example of portfolio variancefor example assume there is a portfolio that consists of two stocks stock a is worth 50 000 and has a standard deviation of 20 stock b is worth 100 000 and has a standard deviation of 10 the correlation between the two stocks is 0 85 given this the portfolio weight of stock a is 33 3 and 66 7 for stock b plugging in this information to the formula the variance is calculated to be variance is not a particularly easy statistic to interpret on its own so most analysts calculate the standard deviation which is simply the square root of variance in this example the square root of 1 64 is 12 81 | |
what is portfolio variance | portfolio variance measures the risk in a given portfolio based on the variance of the individual assets that make up the portfolio the portfolio variance is equal to the portfolio s standard deviation squared | |
how is variance used in constructing a portfolio | most portfolio managers seek to minimize risk and maximize value along the lines of modern portfolio theory mpt the greater the variance in the portfolio indicates the greater the variance of the individual assets and hence the greater the risk portfolio managers thus seek to reduce risk by incorporating assets with low correlations meaning there is little relationship in the movement of the assets in the portfolio | |
where does standard deviation fit in | most portfolio analysts focus on the standard deviation of the portfolio as a whole to get the best picture of the range of outcomes in the portfolio standard deviation is the square root of the variance and provides a more realistic look at the level of risk of the portfolio the higher the standard deviation the more volatile a portfolio is likely to be and vice versa the bottom linevariance is a statistical measure of the volatility or risk of a portfolio and the individual securities in it variance itself is not the main number to pay attention to but rather its standard deviation which is the square root of a portfolio s variance the higher the standard deviation the more risk the portfolio is carrying while the opposite is true for a low standard deviation standard deviation is in turn a factor of the variance and correlation of the securities in a portfolio if the standard deviation is deemed too high or risky the portfolio manager can adjust their holdings to incorporate lower correlation assets in the portfolio and potentially lower the standard deviation or risk of the portfolio | |
what is a position trader | a position trader buys an investment for the long term in the expectation that it will appreciate in value this type of trader is less concerned with short term fluctuations in price and the news of the day unless they alter the trader s long term view of the position position traders might be seen as the opposite of day traders they do not trade actively with most placing fewer than 10 trades in a year understanding the position traderposition traders are by definition trend followers their core belief is that once a trend starts it is likely to continue for some time a distinction can be made between position traders and buy and hold investors who are classified as passive investors and hold their positions for even longer periods than do position traders the buy and hold investor is building a portfolio of assets for a long term goal such as retirement the position trader has spotted a trend made a buy based on that trend and is waiting for it to peak in order to sell this trading philosophy seeks to exploit the bulk of a trend s upwards move as such it is the polar opposite of day trading which seeks to take advantage of short term market fluctuations in between these two are the swing traders who might hold an investment for a few weeks or months because they believe it will soon see a price pop to be successful a position trader has to identify the right entry and exit prices for the asset and have a plan in place to control risk usually via a stop loss level a day trader buys and sells within hours or minutes a position trader buys and holds until a trend peaks a buy and hold investor buys for the long term position traders may use technical analysis fundamental analysis or a combination of both to make their trading decisions they also rely on macroeconomic factors general market trends and historical price patterns to select investments which they believe are about to go higher a big advantage of position trading is that it doesn t take a lot of time once a trade has been initiated and safeguards have been implemented it s a matter of waiting for the desired outcome the main risk is that minor fluctuations that a trader chooses to ignore can unexpectedly turn into trend reversals another drawback is that it ties up money for a prolonged period of time possibly causing opportunity costs all investors and traders must match their trading styles with their personal goals and each style has its pros and cons the first consideration is the reason you are investing in the first place are you building a nest egg for the future do you plan to make a living by trading or do you simply enjoy dabbling in the market and want to own a piece of a company and how much time do you want to devote each week or each day to tracking your portfolio position trading is ideally suited to a bull market with a strong trend it doesn t lend itself easily to a bear market in a period in which the market is flat moving sideways and just wiggling around day trading might have the advantage | |
what is positive correlation | a positive correlation is a relationship between two variables that move in tandem that is in the same direction a positive correlation exists when one variable decreases as the other variable decreases or one variable increases while the other increases because these two different variables move in the same direction they theoretically are influenced by the same external forces 1investopedia ellen lindnerunderstanding positive correlationa perfectly positive correlation means that 100 of the time the variables in question move together by the exact same percentage and direction a positive correlation can be seen between the demand for a product and the product s associated price in situations where the available supply stays the same the price will rise if demand increases additionally gains or losses in certain markets may lead to similar movements in associated markets as the price of fuel rises the prices of airline tickets also rise since airplanes require fuel to operate an increase in this cost is often passed to the consumer leading to a positive correlation between fuel prices and airline ticket prices a positive correlation does not guarantee growth or benefit instead it is used to denote any two or more variables that move in the same direction together so when one increases so does the other the existence of a correlation does not necessarily indicate a causal relationship between variables correlation is a form of dependency where a shift in one variable means a change is likely in the other or that certain known variables produce specific results a general example can be seen within complementary product demand if the demand for vehicles rises so will the demand for vehicular related products and services such as tires an increase in one area has an effect on complementary industries in some situations positive psychological responses can cause positive changes within an area this can be demonstrated within the financial markets in cases where general positive news about a company leads to a higher stock price 2correlation among variables does not necessarily imply causation 4measuring positive correlationin statistics a perfect positive correlation is represented by the correlation coefficient value 1 0 while 0 indicates no correlation and 1 0 indicates a perfect inverse negative correlation 3positive correlation may also be easily identified by graphically depicting a data set using a scatterplot each point on a scatterplot represents one sample item at the intersection of the x axis variable and y axis variable a positive correlation on a scatterplot is evidenced by an upward trending series of points that show that as the x axis variable increases so does the y axis variable 5 | |
when statistically analyzing positive correlation it is important to understand the dataset s p value p value is the statistical measurement of how statistically significant the findings are in general a higher p value indicates there is greater evidence that two data points are more strongly correlated 6 | positive correlation in financea simple example of positive correlation involves the use of an interest bearing savings account with a set interest rate the more money that is added to the account whether through new deposits or earned interest the more interest that can be accrued similarly a rise in the interest rate will correlate with a rise in interest generated while a decrease in the interest rate causes a decrease in actual interest accrued investors and analysts also look at how stock movements correlate with one another and with the broader market most stocks have a correlation between each other s price movements somewhere in the middle of the range with a coefficient of 0 indicating no relationship whatsoever between the two securities 7a stock in the online retail space for example likely has little correlation with the stock of a tire and auto body shop while two similar retail companies will see a higher correlation this is because businesses that have very different operations will produce different products and services using different inputs each of these companies face different risks opportunities and operational challenges modern portfolio theory is heavily rooted in diversification the concept that an investor should hold assets that are widely unrelated to reduce portfolio wide risk this flies in the face of positive correlation investing theory usually states that investors should be wary of widespread positive correlation within their portfolio for most investors an ideal investing strategy is to avoid positive correlation between assets and asset classes though every individual should evaluate their own investing strategy holding assets with positive correlation tends to increase the risk of loss 8beta and correlationbeta is a common measure of how correlated an individual stock s price is with the broader market often using the s p 500 index as a benchmark if a stock has a beta of 1 0 it indicates that its price activity is strongly correlated with the market a stock with a beta of 1 0 has a systematic risk but the beta calculation can t detect any unsystematic risk adding a stock to a portfolio with a beta of 1 0 doesn t add any risk to the portfolio but it also doesn t increase the likelihood that the portfolio will provide an excess return a beta of less than 1 0 means that the security is theoretically less volatile than the market meaning the portfolio is less risky with the stock included than without it for example utility stocks often have low betas because they tend to move more slowly than market averages a beta that is greater than 1 0 indicates that the security s price is theoretically more volatile than the market for example if a stock s beta is 1 2 it is assumed to be 20 more volatile than the market technology stocks and small caps tend to have higher betas than the market benchmark this indicates that adding the stock to a portfolio will increase the portfolio s risk but also increase its expected return some stocks even have negative betas a beta of 1 0 means that the stock is inversely correlated to the market benchmark as if it were an opposite mirror image of the benchmark s trends put options or inverse etfs are designed to have negative betas but there are a few industry groups like gold miners where a negative beta is also common 3a beta of 1 0 indicates a stock that moves in the same direction as the rest of the market a beta of 1 0 indicates that a stock moves opposite to the rest of the market 3positive correlation vs negative correlationnegative correlation is sometimes described as inverse correlation in statistics positive correlation describes the relationship between two variables that change together while an inverse correlation describes the relationship between two variables which change in opposing directions 9examples of positive correlations occur in most people s daily lives the more hours an employee works for instance the larger that employee s paycheck will be at the end of the week the more money is spent on advertising the more customers buy from the company inverse correlations describe two factors that seesaw relative to each other examples include a declining bank balance relative to increased spending habits and reduced gas mileage relative to increased average driving speed one example of an inverse correlation in the world of investments is the relationship between stocks and bonds in theory as stock prices rise the bond market tends to decline just as the bond market does well when stocks are underperforming 9it is important to understand that correlation does not necessarily imply causation variables a and b might rise and fall together or a might rise as b falls but it is not always true that the rise of one factor directly influences the rise or fall of the other both may be caused by an underlying third factor such as commodity prices or the apparent relationship between the variables might be a coincidence 4the number of people connected to the internet for example has been increasing since its inception and the price of oil has generally trended upward over the same period 1011 this is a positive correlation but the two factors almost certainly have no meaningful relationship that both the population of internet users and the price of oil have increased is explainable by a third factor namely general increases due to time passed | |
what is an example of positive correlation | one example of positive correlation is the relationship between employment and inflation high levels of employment require employers to offer higher salaries in order to attract new workers and higher prices for their products in order to fund those higher salaries conversely periods of high unemployment experience falling consumer demand resulting in downward pressure on prices and inflation | |
how do you determine a positive correlation | the most common way to determine a positive correlation is to calculate the correlation coefficient this statistical measurement calculates the strength of the relationship between two variables 12 | |
what does a correlation of 1 0 mean | a correlation coefficient of 1 0 means that two variables have perfectly positive correlation as one variable changes so does the other though this does not mean that one variable directly impacts the outcome or changes to the other both variables always move in tandem and are most likely highly related 3 | |
how do you know if a correlation is strong or weak | the correlation between two variables can be evaluated by determining the dataset s correlation coefficient and p value both measurements analyzed together demonstrate the strength of the relationship between the variables and the reliability of the data 6 | |
does correlation imply causation | correlation does not require causation and it is a common logical fallacy to believe otherwise when two variables are positively correlated that does not necessarily mean that one variable causes changes in the other both variables may be influenced by an unknown third factor or the apparent relationship between the variables might be a coincidence 4the bottom line | |
what is positive economics | positive economics refers to objective analysis in the study of economics most economists look at what has happened and what is currently happening in a given economy to form a basis for future predictions this process is known as positive economics positive economics is different from normative economics which is a form of study that uses value judgments to form a basis for future predictions understanding positive economicsa cornerstone of positive economics is the development of theories through fact based examination of causes and effects many will refer to this study as what is economics due to its use of fact based determinations and thinking normative economics in contrast is called the study of what should have been or what ought to be history of positive economicsthe history of positive economics dates back to the 19th century it was during this time that the idea of what is and what should be were first identified by early economists like john neville keynes and john stuart mill 1keynes believed that logic and methodology were imperative in the study of economics while mill was an economist who blended economics with philosophy 23 mill approached economics from data such as the relationship between supply and demand rather than from an approach of value perspective 3these early economists developed theories to back up their economic observations they used factual evidence from economic conditions to prove these theories to be true 1these ideas were later adapted by contemporary economists such as milton friedman friedman is considered to be one of the most influential economists of the 20th century he held a firm belief in the free market capitalistic system and his theories became known as monetarism friedman was a strong proponent of monetary policy and opponent of fiscal policy and deficit spending saying that they played a big role in the great depression 4although a combination of normative and positive economics helps policymakers devise solutions positive economics is key to investment decisions because it relies on hard facts testing positive economic theoriesconclusions drawn from analyses based on positive economics can be verified and supported by data for example the prediction that more people will save money if interest rates rise would be based on positive economics because past behaviors support that theory this analysis is objective in nature as opposed to normative statements and theories which are subjective most of the information provided by the news media is a combination of positive and normative economic statements or assumptions positive economic theory can help policymakers implement normative value judgments for example it can describe how the government can impact inflation by printing more money and it can support that statement with facts and analysis of behavioral relationships between inflation and growth in the money supply but it doesn t say how to properly enact and follow specific policies regarding inflation and money printing both positive and normative economics provide a clear understanding of public policies when studied together these theories cover both the actual and real facts and statements combined with an opinion based analysis when making policy decisions it is best to understand the positive economic background of behavioral finance and the causes of events as you include normative value judgments on why things happen advantages and disadvantages of positive economicsthere are distinct benefits and drawbacks that are associated with positive economics here we list some of the main advantages and disadvantages of this stream of economics positive economics is based on objective data rather than opinions and value judgments there are facts we have at our disposal to back up any of its claims for instance we can use historical data to determine the relationship between interest rates and consumer behavior higher interest rates lead consumers to stop borrowing because it means they have to spend more on interest since it s based solely on facts and data there are no value judgments in positive economics this allows policymakers to formulate the appropriate measures necessary to tackle any economic conditions to move the economy in a certain direction for example the federal reserve can lower interest rates to prevent a recession individual opinions and emotions can have a big impact on economic policies and procedures for instance people often make decisions in their personal financial lives based on emotions rather than facts this can lead people to make some bad choices but if they follow the data they may be able to make wiser decisions with their personal economic decisions not everyone is concerned with the facts and certain economic conditions are based on emotions as in the example above people often choose to overlook data when they make certain choices experts may suggest saving during times of economic weakness but individuals may decide they want to make a big purchase instead in essence it s hard to take the emotion out of economics just because you have a history of data it doesn t mean that you can come with up a fool proof solution or conclusion that s because economics whether positive or normative isn t an exact science and there are other considerations that often come into play that can change the outcome similarly positive economics may not be a one size fits all approach for instance policymakers often use data to come up with a policy or a solution that affects people differently what works for one segment of the population doesn t affect others the same way raising interest rates may be necessary to help slow growth and is a boon for lenders but it doesn t bode well for borrowers especially those who are already strapped for cash | |
is easily verifiable because it is based on objective data | gives policymakers more power to make decisionsallows individuals to make wiser choices with their economic and financial liveswe can t always separate our emotions from the factseconomics isn t an exact science so there are no fool proof solutions or conclusionspolicies and solutions that arise from positive economics don t affect everyone the same wayreal world examples of positive economicslet s consider the fight for 15 movement which calls for a 15 minimum wage on face value this may be considered a policy proposal grounded in normative economics 5 after all the stance that a 15 minimum wage is ideal represents a value judgment proponents argue that raising the minimum wage would be good while opponents argue that it would be harmful there has been a lot of research about minimum wage increases but there are no definitive findings that offer broad sweeping conclusions about whether higher minimum wages are good or bad but there are details from certain studies that could be considered examples of positive economics in 2015 the city of seattle passed a local ordinance to gradually increase the minimum wage for workers in the city the move meant that all workers would earn at least 15 per hour by 2021 or sooner depending on specific employment details since that time there have been two major studies on the impact of the law a study by researchers from the university of california berkeley focused specifically on restaurant employees according to study unemployment in seattle went from 5 7 in 2012 to 3 6 in 2016 median annual earnings for employees increased by 13 4 over those years 6according to these researchers employees of fast food restaurants saw an increase in their earnings thanks to an increase in seattle s minimum wage this specific data is an example of positive economics but the researchers conclusion that the higher minimum wage was a success is not this is because the focus of the study was not broad or exhaustive enough to make such a finding meanwhile researchers at the university of washington concluded that the minimum wage increase was not successful that conclusion another value judgment is also not an example of positive economics however some of the specific data they collected would be an example of positive economics 7for instance they discovered that when the minimum wage increased the hours worked by low wage employees decreased thus the total payroll for low income employees fell by roughly 125 per month following the minimum wage increase 7 the number of low wage workers decreased by 1 and hours for those still employed decreased slightly as well |
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