A short note on the Growth Potential of risky fund investments

Abstract

Several important breakthroughs within portfolio theory, capital asset pricing and return volatility have been made in the past few decades. Together with the liberalization of international capital asset trading, the global markets are set for an ever-improved efficiency and stability in the near future. Yet, from a small bank client's viewpoint, little has changed during almost five decades within the domain of financial investment support offered by the banks. With the focus of the contemporary research placed on advanced issues within portfolio theory, well-functioning financial markets and the growth impact of the banking sector, it seems as if the decision needs of the small bank client have been largely neglected. The risk measures currently used do not focus on the time of entry in a risky investment. Selecting a wrong entry point for fund investments can usually not be compensated by active governance within a reasonable investment period. In order to utilize the common practices in mutual fund investment services of the banks, a significant amount of knowledge of the underlying mechanisms of asset pricing and the fund dynamics is required from the investor. In the current note, we present a simple statistic, the Growth Potential Index (GPI), which captures the essential characteristics of relevance for determining the time of entry in a mutual fund investment. The mirror image of the GPI, the Decline Potential Index (DPI), is also presented. The DPI may provide valuable decision support information for specifying the time of exit from a long position in the fund. As GPI and DPI are simple to understand and calculate and contain valuable decision support information for a small client, their inclusion in the websites would seem to be a worthwhile effort for any esteemed financial institution offering stock governance services. © 2011 Macmillan Publishers Ltd.