When we start working with a new client, one of the first conversations we have is about setting prices. A company’s pricing strategy (and whether they have articulated it) tells me a lot about the culture of the organization and how they make money. Here’s a video that discusses different pricingstrategies as well as which strategy will yield the greatest return.

Discover 3 Things You Should Know About Setting Prices

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Core Satellite assetallocation is an investmentstrategy that consists of two parts the “core” and the “satellite.” The first part is known as the core portfolio. It invests in traditional fixed incomesecurities like index funds, mutual funds, and other passive strategyinvestments. The second is known as the satellite portfolio. It invests a percentage of the available funds in individual stocks and other actively traded investment.

Core Satellite Portfolio Explained

The core-satellite strategy has been around for a while. It has been useful to many investors who take full advantage of the core satellite approach. It allows investors to reduce their risk in a passive well diversified portfolio, while allowing these investors to seek out higher expected returns. The core satellite investmentstrategy is beneficial because the investor takes on little extra risk but can normally expect higher returns in the market.

Core Satellite Portfolio Example

Jacob has some extra cash that is sitting in a savings account at a bank. He has recently decided that he wants to invest this amount in the market. Jacob has also decided that he will use the core satellite investment approach. Jacob has thus decided that he will invest 80% of the cash in a passive mutual fund, and the other 20% in individual stocks that he believes will perform above the market. By doing this Jacob is safe from any huge downfalls in the market because he has a well diversified portfolio in the mutual funds, but he also expects a higher return from the individual stocks.

The arbitrage pricing theory (APT) is a multifactor mathematical model used to describe the relation between the risk and expected return of securities in financial markets. It computes the expected return on a security based on the security’s sensitivity to movements in macroeconomic factors. Then use the resultant expected return to price the security.

The arbitragepricing theory is based on three assumptions. First, that a factor model can be used to describe the relation between the risk and return of a security. Then, idiosyncratic risk can be diversified away. Finally, efficient financial markets do not allow for persisting arbitrage opportunities.

In addition, the arbitrage pricing theory calculates the expected return for a security based on the security’s sensitivity to movements in multiple macroeconomic factors. Whereas the standard capital asset pricing model (CAPM) is a single factor model, incorporating the systematic and firm specific risk related to the overall market return, the arbitrage pricing theory is a multifactor model.

Then, set up the arbitrage pricing theory to consider several risk factors, such as the business cycle, interest rates, inflation rates, and energy prices. The model distinguishes between both systematic risk and firm-specific risk. It also incorporates both types of risk into the model for each given factor.

Arbitrage Pricing Theory Formula

The formula includes a variable for each factor, and then a factor beta for each factor, representing the security’s sensitivity to movements in that factor. Because it includes more factors, consider the arbitrage pricing theory more nuanced – if not more accurate, than the capital asset pricing model.

A two-factor version of the arbitrage pricing theory formula is as follows:

r = E(r) + B_{1}F_{1} + B_{2}F_{2} + e

r = return on the security E(r) = expected return on the security F_{1} = the first factor B_{1} = the security’s sensitivity to movements in the first factor F_{2} = the second factor B_{2} = the security’s sensitivity to movements in the second factor e = the idiosyncratic component of the security’s return