Answer the 5 questions of investment portfolio management Essay

Answer the 5 questions of investment portfolio management - Essay employmentPresent value of Dividends employs the cost of equity as the tax write-off figure. Operating free exchange spring is the cash residue after eliminating direct costs, working(a) capital and capital expenditure needed for future growth, but before any payments to suppliers of capital. The firms weighted average cost of capital (WACC) is the discount rate employed in determining operating free cash f showtime. Free cash flow to equity refers to operating free cash flow less payment to debt holders (Strong, 2008). The firms cost of equity is used as the discount rate. Present value of Cash flow all toldows a period of flexibility for changes in sales and expenses, which implies varying rates of growth over time. However, present value of cashflow valuation approach has a weakness in that it is severely dependent on growth rates of cash flows and the discount rate estimates. Relative valuation approach to security valuation offers information on how the food market is presently valuing the stock. Components measured using the relative valuation technique include the price earning ratio, price to sales ratio, price to book value and the price to cash flow. Unlike the present value of security valuation, relative valuation approach does not offer insights as to whether current valuations are appropriate. Thus, valuations could be too low or high at a certain point in time. As such, Relative valuation is suitable when there are comparable firms in terms of the risk, industry and size in the market. It is also appropriate when the aggregate market and the entitys industry are not under valuation extreme. That is to misbegotten that the collective market and the firms industry should not be acutely overvalued or undervalued (Strong, 2008). Both cash flow approach and relative valuation approach have several factors in common. One is that they are both affected by the investors require d bring to on the stock since this return rate becomes a significant element of the discount rate. Secondly, the two valuation approaches are affected by the growth rate estimation employed in the valuation technique such as dividends, sales or earnings. Therefore, the two approaches may be considered as complementary. 2. The concepts of systematic and unsystematic risk, variance, covariance, standard deviation and genus Beta as each of these relate to investment management. Unsystematic risks refer to the kind of uncertainty that is associated with the industry in which a company operates. Unsystematic risks are also referred to as specific risks or diversifiable risks for they are specific in each industry, and they are reduced through diversification. Unsystematic risks arise as a termination of factors particular to an industry or the firm such product category, marketing, research and development and pricing. Systematic risks refer to the kind of uncertainty that is inherent in the only market segment. They are also referred to as market risks or non-diversifiable risks because they are inherent in the entire market and diversification do not military issue in their reduction. Systematic risks are such as war, inflation, change in taxation, global security perils and political instability that affect the functioning of firms in all industries. Total risk is a combination of systematic and unsystematic risks. Variance is the measure of volatility from the mean. Variance helps an investor to establish the risk involved in get a certain security. A higher variance indicates greater variability and thus greater risk. A greater variance also