100% Original, Plagiarism Free, Tailored to your instructions

Order Now!

The bases of securities selection

The bases of securities selection
Security selection refers to the choice of the most suitable stocks for investment in anticipation of some future return. Normally, portfolio managers make investment decisions using various investment models such as a capital asset pricing model and arbitrage price model to evaluate the most desirable portfolios for investment (Lawton and Todd, 56). Additionally, the portfolio manager selects the most suitable portfolios basing on the firm’s objectives and associated risk from a given investment portfolio. From a financial perspective, high returns from a given portfolio leads to an increase in the risk inherent (Gibson, 36). Therefore, it is prudent to evaluate the anticipated returns and risks associated with a given portfolio prior to investment.
Bases of security selection
There are several bases on which both individual and corporate investors may use to select the most profitable securities for investment. Portfolio managers may conduct prior portfolio assessments basing their assessment on the investment objectives, firms’ risk tolerance, and the target industry. The basis of investment objectives varies among different firms (Maginn, 46). The basic investment objectives, which many firms apply when selecting investment portfolios, are several. They include capital appreciation objectives, speculation objectives, and current income objectives (Maginn, 65). Capital appreciation objectives involve investing in securities and holding those securities for a long period in anticipation of higher returns. Speculative objectives involve investing in securities while anticipating quick returns. Finally, the current income objectives involve investing in securities that pay high rates of dividends consistently. In addition, firms may select securities on the basis of the firms’ risk tolerance. Firms with high risk tolerance may go for securities with higher returns. On the other hand, firms with low risk tolerance may go for securities with insignificant returns (Elton, 69). This is because the higher the returns, the higher risk and vice versa. Securities may also be selected on the basis of industry. In this case, firms may diversify their portfolios by investing into different industries in order to minimize the investment risk (Elton, 78).
Stock analysis
Stocks analysis may help to determine the stocks that are undervalued, overvalued, and those stocks that are correctly priced. The undervalued stocks are those that give higher returns than anticipated. On the contrary, overvalued stocks tend to give lower returns than the anticipated. Finally, correctly priced stocks have anticipated returns equal to the actual returns (Lawton and Todd, 68). The four securities from the table below may help to determine the undervalued securities and overvalued securities.

Expected market returns/Prices
Risk free rate(RF)

30 %
8 %

25 %
8 %

35 %
8 %

40 %
8 %

Expected market returns/ prices
Price=EPS × P/E
Security A =60%× 0.5
Security B=50%×0.5
Security C=70%×0.5
Security D=80%×0.5
Actual returns/Price may be determined using both Capitals pricing model as shown below
Actual returns for stock A
CAPM=8+ (30-8)0.5
=19%     Overvalued
Actual returns for stock B
CAPM=8+ (25-8)0.7
=19.9%   Overvalued.
Actual Returns for stock C
CAPM=8+ (35-8)1.6
=43.2%     Overvalued.
Actual Returns for stock D
CAPM=8+ (40-8)0.8
= 33.6%     Undervalued.
Interpretation of the above computation
It can be noted that security stocks A, B and D were overvalued. This is because the three securities actual returns were lower than the expected returns. Security A was overvalued by 11%, while security B was overvalued by 5.5%. On the other hand, security D was overvalued by 6.4%. On the contrary, security C was undervalued by 8.2%. This is because the actual returns of this security stock are higher than the anticipated returns. However, there were no securities that were correctly priced based on the stock analyzed. Therefore, investors may select the best securities, not only on the basis of anticipated returns and risk associated with each security, but also on the basis of analysis of the undervalued and overvalued securities (Lawton and Todd, 86).
Firm activities that may help to increase stock prices
The firm activities that may help to increase the stock prices include historical price analysis. In this regard, the firm may analyze the past prices and compare them with the current prices. This is aimed to establish whether there will be a possibility of increasing stock prices (Lawton and Todd, 110). Additionally, the firm may participate in corporate social responsibilities so as to build its reputation that may indirectly lead to increase in company’s profits. Also, the firm may start may decrease dividends payout and reinvest for increased gains (Maginn, 112).
The basis of security selection and analysis vary from one company to another. This is because various companies have different ways of selecting the securities for investment. From the discussion above, it is clear how firms incorporate the various investment objectives and risk tolerance among other factors to evaluate the suitability of a given investment. The discussion further focuses on how assets may be selected based on the concept of undervaluation, overvaluation, and correctly priced securities. Notably, there are those activities that the firms may conduct to increase the securities prices.


Our Service Charter

  1. Excellent Quality / 100% Plagiarism-Free

    We employ a number of measures to ensure top quality essays. The papers go through a system of quality control prior to delivery. We run plagiarism checks on each paper to ensure that they will be 100% plagiarism-free. So, only clean copies hit customers’ emails. We also never resell the papers completed by our writers. So, once it is checked using a plagiarism checker, the paper will be unique. Speaking of the academic writing standards, we will stick to the assignment brief given by the customer and assign the perfect writer. By saying “the perfect writer” we mean the one having an academic degree in the customer’s study field and positive feedback from other customers.
  2. Free Revisions

    We keep the quality bar of all papers high. But in case you need some extra brilliance to the paper, here’s what to do. First of all, you can choose a top writer. It means that we will assign an expert with a degree in your subject. And secondly, you can rely on our editing services. Our editors will revise your papers, checking whether or not they comply with high standards of academic writing. In addition, editing entails adjusting content if it’s off the topic, adding more sources, refining the language style, and making sure the referencing style is followed.
  3. Confidentiality / 100% No Disclosure

    We make sure that clients’ personal data remains confidential and is not exploited for any purposes beyond those related to our services. We only ask you to provide us with the information that is required to produce the paper according to your writing needs. Please note that the payment info is protected as well. Feel free to refer to the support team for more information about our payment methods. The fact that you used our service is kept secret due to the advanced security standards. So, you can be sure that no one will find out that you got a paper from our writing service.
  4. Money Back Guarantee

    If the writer doesn’t address all the questions on your assignment brief or the delivered paper appears to be off the topic, you can ask for a refund. Or, if it is applicable, you can opt in for free revision within 14-30 days, depending on your paper’s length. The revision or refund request should be sent within 14 days after delivery. The customer gets 100% money-back in case they haven't downloaded the paper. All approved refunds will be returned to the customer’s credit card or Bonus Balance in a form of store credit. Take a note that we will send an extra compensation if the customers goes with a store credit.
  5. 24/7 Customer Support

    We have a support team working 24/7 ready to give your issue concerning the order their immediate attention. If you have any questions about the ordering process, communication with the writer, payment options, feel free to join live chat. Be sure to get a fast response. They can also give you the exact price quote, taking into account the timing, desired academic level of the paper, and the number of pages.

Excellent Quality
Zero Plagiarism
Expert Writers

Instant Quote

Single spaced
approx 275 words per page
Urgency (Less urgent, less costly):
Total Cost: NaN

Get 10% Off on your 1st order!