Extensive resources and innovative computer technology have enabled some individ
ID: 2622582 • Letter: E
Question
Extensive resources and innovative computer technology have enabled some individuals to create efficient capital markets. In these markets many analysts and portfolio managers have an increased difficulty to consistently achieve superior results. What are some ways in which portfolio managers can improve their performance in these markets?
There are investors who claim they only invest in companies with great products and outstanding management, and ignore the stock price. Does it still make sense to develop an efficient frontier while adhering to this approach to investment? Discuss why or why not.
Explanation / Answer
Some ways to improve performance of portfolio managers in efficient capital markets are
1) Diversification : Diversification minimizes the risk.
2) Equity over bonds : Historically stock markets have outperformed bond markets.
3) Large (Value) over Small (growth) companies : Historically companies with high market caitalization have outperformed small growth companies.
4) Managing expenses : Managing expenses gives competitive edge.
In efficient markets where the information is available to everyone , companies with great products and outstanding management will be rewarded accordingly in the form of share price appreciation in the future.
In case of efficient markets the efficient frontier is comprised of performing companies and hence it makes sense to develop an efficient frontier.
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