Asset allocation refers to the strategy of dividing your total investment portfolio among various asset classes, such as stocks, bonds and money market securities. Essentially, asset allocation is an organized and effective method of diversification.
Long-term “investment policy” is usually established based on the investor’s long-term objectives and constraints of the investor. The return objective is the key variable. A high return objective can only be obtained by investing in asset classes with a higher return. Based on historical experience, without constraints, equities have by far the highest return. An […]
a) Unsecured loans. The most common way to finance a temporary cash deficit is to arrange a short-term unsecured bank loan. b) Secured borrowing. Banks and other finance companies often require security for a loan. Security for short-term loans usually consists of accounts receivable or inventories. c) Other sources. There are a variety of other […]
Actually there is no definitive answer. Several considerations must be included in a proper analysis: a) Cash reserves. The flexible financing strategy implies surplus cash and little short-term borrowing. This strategy reduces the probability that a firm will experience financial distress. Firms may not need to worry as much about meeting recurring, short-run obligations. However, […]
If a firm has a temporary cash surplus, it can invest in short-term marketable securities. The market for short-term financial assets is called the money market. The maturity of short-term financial assets that trade in the money market is one year or less. Most large firms manage their own short-term financial assets, transacting through banks […]
The target cash balance involves a trade-off between the opportunity costs of holding too much cash and the trading costs of holding too little. If a firm tries to keep its cash holdings too low, it will find itself selling marketable securities (and perhaps later buying marketable securities to replace those sold) more frequently than […]
There are three primary reasons for holding cash. First, cash is needed to satisfy the transactions motive. Transaction-related needs come from normal disbursement and collection activities of the firm. The cash inflows and outflows are not perfectly synchronized, and some level of cash holdings is necessary to serve as a buffer. The second reason for […]
Restrictive short-term financial policies are a)Keeping low cash balances and no investment in marketable securities. b)Making small investments in inventory. c)Allowing no credit sales and no accounts receivable.
Flexible short-term financial policies include: a)Keeping large balances of cash and marketable securities. b)Making large investments in inventory. c)Granting liberal credit terms which results in a high level of accounts receivable.
The policy that a firm adopts for short-term finance will be composed of at least two elements: a) The size of the firm’s investment in current assets. This is usually measured relative to the firm’s level of total operating revenues. A flexible or accommodative short-term financial policy would maintain a high ratio of current assets […]
