Investment and Portfolio Analysis Essay Example | Topics and Well Written Essays - 3000 words - 1

Investment and Portfolio Analysis - Essay Example 102-103). Such the yields are available for the public. For instance, one can easily find them on the Internet. The characteristics of a bond determine timing and values of associated cash flows. Therefore, an investor can easily discount all cash flows associated with a bond to figure out fairly good estimate of its value. As for the common stocks, the company that issues the stock can invest some portion of its earnings in projects in hope to increase the value of the firm. The rest of the earnings is distributed among the shareholders in the form of dividends. Unfortunately, â€Å"the details on forthcoming projects are not generally public information† (Ross, Westerfield and Jaffe 1999, p. 109). Therefore, the patterns of cash flows shareholders receive are not known in advance and can be much more complicated than those bondholders receive. However, a number of techniques for stock valuation were developed. All of them need as input â€Å"investor’s required retur n on the stock† and â€Å"growth rate† of one or several indicators of companys performance such as "dividends, earnings, cash flow or sales" (Reilly and Brown, 2003, p. 377). To estimate the first input, investors can use the return of a common stock of the respective class and rating as a useful benchmark (Haugen, 1979, p. 68). Due to above mentioned complexity, accompanied by the fact that the guarantees to the investors in common stocks differ from the ones to the investors in bonds, sometimes these inputs can be estimated only roughly. Moreover, their uncertainties can turn out to be â€Å"too large to be practical† (Ross, Westerfield and Jaffe 1999, p. 111). Thus, generally investors produce better estimates of bond values than those of common stock ones. To identify appropriate investments, portfolio managers figure out a set of â€Å"marketwide and industrywide factors† that makes unsystematic risks of