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Summary Cost Management Strategies for Business Decisions

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⦁ Introduction This report intends to explain the aims and objectives of the portfolio project undertaken. In order to determine whether any aims and objectives have been achieved, relevant theory and analysis of findings will be used. The aims of this portfolio project was to invest a notional principal amount of £200,000 was made available to invest in securities on the London Stock Exchange during the period from 4th October 2010 till the 1st April 2011, on which date the portfolio will be liquidated and any gains realised. Furthermore the project will be split between the two terms, in which to different investment strategies will be applied, in the first term an active trading strategy shall be adopted whereas in the second term a buy and hold strategy shall be put into place. The objective of this project was to develop an understanding of the stock market and to create a portfolio that is well diversified and minimises total risk. Moreover, this report shall explain any relevant theory in order to and demonstrate how this affected the strategy that was adopted for investment and how it was used in practice. It will also outline any limitations that were found through the project. Furthermore, the findings will be explained, showing how using different strategies affected the profit from investment, for example if active trading gave higher profit than buying and holding the shares. Finally, the report will come to a conclusion which will show in general how the market has performed and if the project would be approached differently if done again. ⦁ Theory: ⦁ Stock Market. The stock market acts as an efficient allocator of funds within the financial economy. The stock market is split into the primary and secondary markets. The primary market is there so newly issued shares can be sold to raise capital for the company. The secondary market is for existing shares and involves in the buying and selling these shares. ⦁ Relationship between risk and return The risk of a security is the uncertainty that the actual return will vary from the actual return. In an efficient capital market investors are risk averse and will want greater levels of return for being exposed to higher levels of risk. However with greater levels of risk the investor has a higher chance of earning greater returns. The risks that the investors are likely to face are systematic and unsystematic risk. Systematic risk is the inherent market risk that every business and investor faces and cannot be reduced with diversification, the amount of systematic risk the investor is out of their control it controlled by factors in the environment surrounding the market and therefore is unavoidable. Unsystematic risk is the company or industry specific risk and can be reduced with the appropriate diversification; it is caused by a number of factors e.g. managerial inefficiency. Unsystematic risk is broken down into 2 categories; Business Risk and Financial Risk. Business risk is the risk associated with circumstances of the particular company which may affect the ability of the company to produce stable earnings. Financial risk of the company is affected by the level debt to equity financing it has, with higher levels of debt the investor has a higher risk of losing their investment if the company goes into administration. ⦁ Portfolio Theory:

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