Investment

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- Further Advice, notice and warnings on the investing proposal for our customers

During the process to derive the optimal portfolio, there are some constraints that we ignored in order to get the portfolio. First of all, there can be estimation error. Historical estimation is to use sample data from past to predict population parameters. Besides, there can be some differences between between the situation in the past and that in the future. Secondly, we ignore taxes. Sometimes it can be too costly to hold an asset if the associated tax is too high. Thirdly, we ignored the transaction costs. Because the optimal portfolio is changing up-to-date, there is an incentive to optimize frequently. However, too frequent trading would incur more transaction costs. Last but not least, an investment strategy is designed for medium-to long term investment. If my client’s aim is for short-term investment, our optimal portfolio may not be so useful.

4. Modification of the procedure incorporate with latest news

The procedure to derive the optimal portfolio is almost the same as we have done previously. The differences are among some parameters and figures derived from calculating based on historical data.

4.1 From the macroeconomic perspective

To begin with, Let us discuss from the macroeconomic perspective. One important figure is Rf. Usually, risk-free assets are T-bill, T-bond and T-note. Once there is any change in their interest rates, we need change the corresponding value of Rf. Besides, there can be inflation. When we are estimating the expected return of each stock, if it is highly likely that inflation in the coming future is increasing, investors will desire a higher return rate from each individual stock. Hence, we need to change the corresponding expected return rate.

4.2 From the microeconomic perspective

As to the particular stock, it is closely related to the state of business of the company. When a person wants to trade stocks, what he focuses most on is the expected return of these stocks, which is determined by the latest news or inside information about the state of the company’s operations. The main factors that can affect the company's stock price can be concluded into four aspects.

First is profitability of the company. If the news is released that an improvement that can promote the performance of the company and then contribute much to its assets while has few risks, such as the invention of some new technologies, the creation of some new products, will occur recently, investors may expect a higher return and should be better to hold more shares of that company.

Secondly, consider the product life cycle theory, which contains research and development, growth, maturity, and decline, the stock prices of companies will show a regular fluctuation. Investors should combine different fluctuant trendency of different products with the commission fees of adjustment of the stock weights, to determine whether they should change the weight of the stocks in the portfolio.

Thirdly, the change of the policies of dividend distribution will affect the choice of investors. If the company distributes a stable dividend, the expectation to benefit from the dividend will also keep unchanged, which has no influence on the stock price. But if the company changes into a policy contributing dividend at a certain ratio over its profit, the higher of that ratio, and the higher of the profitability of that company, the more the shares investors want to hold.

Last but not least, the news may be about seasoned equity offering or reduction clearing. If the company takes seasoned equity offering, the profitability of each assets will decrease. And if the company has to take reduction clearing and sell off its assets at a price lower that the market, the shareholders will lose a lot and the stock price will continue to decrease until the company shows a turn from loss to gain.Under these situations, the risk rate of the company goes up while the return decreases, which let investors underweight the holding of that shares.

All in all , the operation performance inside the company has giant influences on the risk and return of the company, which makes the investors to adjust the weights of each stocks in the portfolio according to the specific news.