Stock Portfolios to Help Support

Stock Portfolios

To help support the ideas from the CAPM model, Adcock (2010) determined that a variety of asset classes must be purchased in conjunction with different time frames. This helps to reduce risks from volatility inside the markets, economic shocks and to take advantage of new opportunities when they first arise. These different elements are important in providing investors with the ability to balance out potential hazards and maximize their overall returns. (Adcock, 2010)

To improve the percentage gains and dividends they are receiving requires spending more time studying their investments. This means that they will have to look at numerous factors and concentrate on those areas that will balance each other out. To assist them in achieving these objectives, Fogelstrom (2010) determined that many are utilizing software programs and stock screeners. This is providing them with more choices. (Fogelstrom, 2010)

However, during this process, there needs to be a focus on mitigating risks utilizing a number of strategies. When this occurs, investors will have better performance by taking a longer term focus and concentrating on reducing volatility. These insights are important in illustrating how the General Portfolio Theory and CAPM model can be effective. It is also corroborating earlier findings by illustrating how systematic risk can only be accounted for by making constant adjustments to the portfolio. (Fogelstrom, 2010)

To deal with the increased amounts of volatility, there have been changes made to the CAPM model (most notably: the downside CAPM). This is when there is a focus on using the downside beta to determine how much risk exists inside the portfolio. Under this approach, fund managers and investors will calculate a negative coefficient. This is designed to show the vulnerability of the portfolio and various positions to sudden shocks. According to Estrada (2002), these ideas have been utilized by firms such as Morgan Stanley. To determine possible threats and analyze how much fluctuation will be seen from the markets during these times. This helps managers to make informed decisions about possible reactions based upon systematic events. (Estrada, 2002)

Moreover, Brown (2010) determined that different approaches must be utilized under the CAPM model to account for risk. This is because the markets are constantly shifting and new events will take place which change the thinking of economists, analysts, fund managers and investors. To stay on top of what is happening, requires utilizing contrasting forms of investigation during the process. These insights are showing how different forms of regression analysis must be utilized to fully understand what is taking place. (Brown, 2010)

As a result, the CAPM approach can provide a good background about what is happening in the markets and effectively accounting for risks. However, there are times when different forms of analysis must be utilized. The best way to achieve for these objectives is use other areas which can be augmented under the CAPM model. (Chang, 2011)