Portfolio-optimization models for small investors

Since 2010, the client base of online-trading service providers has grown significantly. Such companies enable small investors to access the stock market at advantageous rates. Because small investors buy and sell stocks in moderate amounts, they should consider fixed transaction costs, integral transaction units, and dividends when selecting their portfolio. In this paper, we consider the small investor’s problem of investing capital in stocks in a way that maximizes the expected portfolio return and guarantees that the portfolio risk does not exceed a prescribed risk level. Portfolio-optimization models known from the literature are in general designed for institutional investors and do not consider the specific constraints of small investors. We therefore extend four well-known portfolio-optimization models to make them applicable for small investors. We consider one nonlinear model that uses variance as a risk measure and three linear models that use the mean absolute deviation from the portfolio return, the maximum loss, and the conditional value-at-risk as risk measures. We extend all models to consider piecewise-constant transaction costs, integral transaction units, and dividends. In an out-of-sample experiment based on Swiss stock-market data and the cost structure of the online-trading service provider Swissquote, we apply both the basic models and the extended models; the former represent the perspective of an institutional investor, and the latter the perspective of a small investor. The basic models compute portfolios that yield on average a slightly higher return than the portfolios computed with the extended models. However, all generated portfolios yield on average a higher return than the Swiss performance index. There are considerable differences between the four risk measures with respect to the mean realized portfolio return and the standard deviation of the realized portfolio return.

Portfolio-optimization models for small investors

Since 2010, the client base of online-trading service providers has grown significantly. Such companies enable small investors to access the stock market at advantageous rates. Because small investors buy and sell stocks in moderate amounts, they should consider fixed transaction costs, integral transaction units, and dividends when selecting their portfolio. In this paper, we consider the small investor’s problem of investing capital in stocks in a way that maximizes the expected portfolio return and guarantees that the portfolio risk does not exceed a prescribed risk level. Portfolio-optimization models known from the literature are in general designed for institutional investors and do not consider the specific constraints of small investors. We therefore extend four well-known portfolio-optimization models to make them applicable for small investors. We consider one nonlinear model that uses variance as a risk measure and three linear models that use the mean absolute deviation from the portfolio return, the maximum loss, and the conditional value-at-risk as risk measures. We extend all models to consider piecewise-constant transaction costs, integral transaction units, and dividends. In an out-of-sample experiment based on Swiss stock-market data and the cost structure of the online-trading service provider Swissquote, we apply both the basic models and the extended models; the former represent the perspective of an institutional investor, and the latter the perspective of a small investor. The basic models compute portfolios that yield on average a slightly higher return than the portfolios computed with the extended models. However, all generated portfolios yield on average a higher return than the Swiss performance index. There are considerable differences between the four risk measures with respect to the mean realized portfolio return and the standard deviation of the realized portfolio return.

The Nestlé crash

On November 17, 1988, the board of directors of Nestlé AG decided to allow foreign investors to hold Nestlé registered stock, reversing a longstanding practice. This decision had a tremendous impact on the prices of the firm's three classes of common stock, as well as on the prices of several other corporations traded on the Zürich stock exchange. These price changes can be explained by the hypothesis that demand curves slope down.

Understanding the underlying mechanisms of recent Jatropha curcas L. adoption by smallholders in Kenya: A rural livelihood assessment in Bondo, Kibwezi, and Kwale districts

Between 2004 and 2007, NGOs, community based organisations and private investors promoted jatropha in Kenya with the aim of generating additional income and producing biofuel for rural development. By 2008 it became gradually evident that jatropha plantations (both mono- and intercropping) are uneconomical and risky due to competition for land and labour with food crops. Cultivation of jatropha hedges was found to have better chances of economic success and to present only little risks for the adopting farmers. Still, after 2008 a number of farmers went on adopting jatropha in plots rather than as hedges. It is hypothesised that lack of awareness about the low economic prospects of jatropha plantations was the main reason for continued adoption, and that smallholder farmers with higher resource endowments mainly ventured into its cultivation. In this study we provide an empirical basis for understanding the role of households' capital assets in taking up new livelihood strategies by smallholder farmers in three rural districts in Kenya. For that purpose, we assess the motivation and enabling factors that led to the adoption of jatropha as a new livelihood strategy, as well as the context in which promotion and adoption took place. A household survey was conducted in 2010, using a structured questionnaire, to collect information on household characteristics and capital asset endowment. Data were analysed using descriptive statistics and non-parametric statistical tests. We established that access to additional income and own energy supply were the main motivation for adoption of jatropha, and that financial capital assets do not necessarily have a positive influence on adoption as hypothesised. Further, we found that the main challenges that adopting farmers faced were lack of access to information on good management practices and lack of a reliable market. We conclude that continued adoption of on-farm jatropha after 2008 is a result of lacking awareness about the low economic value of this production type. We recommend abandoning on-farm production of jatropha until improved seed material and locally adapted agronomic knowledge about jatropha cultivation becomes available and its production becomes economically competitive.

Food Security and Agri-Foreign Direct Investment in Weak States: Finding the Governance Gap to Avoid ‘Land Grab’

Food security is important. A rising world population coupled with climate change creates growing pressure on global world food supplies. States alleviate this pressure domestically by attracting agri-foreign direct investment (agri-FDI). This is a high-risk strategy for weak states: the state may gain valuable foreign currency, technology and debt-free growth; but equally, investors may fail to deliver on their commitments and exploit weak domestic legal infrastructure to ‘grab’ large areas of prime agricultural land, leaving only marginal land for domestic production. A net loss to local food security and to the national economy results. This is problematic because the state must continue to guarantee its citizens’ right to food and property. Agri-FDI needs close regulation to maximise its benefit. This article maps the multilevel system of governance covering agri-FDI. We show how this system creates asymmetric rights in favour of the investor to the detriment of the host state’s food security and how these problems might be alleviated.