Portfolio Theory As An Investment Decision Instrument

Markowitz (1952, 1956) pioneered the development of a quantitative method that takes the diversification benefits of portfolio allocation into account. Modern portfolio theory is the result of his work on portfolio optimization. Ideally, in a mean-variance optimization model, the complete investment opportunity set, i.e. all assets, should be considered simultaneously. However, in practice, most investors distinguish between different asset classes within their portfolio-allocation frameworks.

Advisors and investors would do well to pay as much attention to the expected volatility of any portfolio or investment as they do to anticipated returns. Moreover, all things being equal, a new investment should only be added to a portfolio when it either reduces the expected risk for a targeted level of returns, or when it boosts expected portfolio returns without adding additional risk, as measured by the expected standard deviation of those returns. Lesson 2: Don’t assume bonds or international stocks offer adequate portfolio diversification. As the world’s financial markets become more closely correlated, bonds and foreign stocks may not provide adequate portfolio diversification. Instead, advisors may want to recommend that suitable investors add modest exposure to nontraditional investments such as hedge funds, private equity and real assets. Such exposure may bolster portfolio returns, while reducing overall risk, depending on how it is structured. Lesson 3: Be disciplined in adhering to asset allocation targets. The long-term benefits of portfolio diversification will only be realized if investors are disciplined in adhering to asset allocation guidelines. For this reason, it is recommended that advisors regularly revisit portfolio allocations and rebalance

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

Harry Markowitz 1991, developed a theory of “Portfolio choice”, that allows the investors to examine the risk as per the expected returns. In modern World, this theory is known as Modern portfolio theory (MPT). It attempts to attain the best portfolio expected return for a predefined portfolio risk, or to minimise the risk for the predefined expected returns, by a careful choice of assets. Though it’s a widely used theory, still has been challenged widely. The critics question the feasibility of theory as a strategy for

not  incur  in  more  risks  than  necessary  and  choose  the  investment  that  yields  the  highest

Diversity investment among stock markets, bounds and nationally and internationally is the best me method of maintaining the risk of investment and expanding its growth. The fourth importance is the cost of single investment; the less money an investor pay; the more financial resources will have to take advantage on future investment opportunities that expand the return. Becker’s final advice of investment success was for investors to slick with their plan. “Lethargy bordering on sloth remains the cornerstone of our investment style”, Warren Buffett. Many investors get influenced by what goes around them and the media to end their investment prematurely or get involved in risky commitment outside of their goals.

future performances and ends with the choice of portfolio. This paper is concerned with the

a. Objective(s). It is out of doubt that no matter how diversified the portfolio is, systematic risk can never be eliminated. The risk associated with individual stocks can be reduced, but general market risks affect almost every stock. So it is important to diversify between different asset classes and industries as well. The key is to find a medium between risk and return. The objective of this paper is to discuss importance of diversification of investment portfolio within industries and project the theory on the example of two portfolios. The first portfolio tends to be undiversified and consists of shares of companies from banking sector. The undiversified portfolio is as follows:

Topics that will be covered in this final portfolio project will include both retirement and nonretirement investment products. For both categories, there is what is known as overconfidence as it pertains to financial literacy along with stock market participation by many investors in ways they may be putting larger amounts of the capital at greater risk than they should be. Strategies for mitigating risk of outliving a retirement portfolio will also be presented along with tax efficient ways to withdraw funds from investment vehicles that are tax-deferred.

“Higher risks lead to higher returns” is one of the basic concepts in the investment theory. Also, the CAPM, thought for decades at universities as one of the basic asset pricing models, supports it.

A realized return is the amount of actual gains that is made on the value of a portfolio over a specific evaluation period. This takes into consideration any earnings generated by each of the assets contained in the portfolio, as well as any losses that were incurred as a result of a shift in the value of the individual assets. It is possible to identify the realized return associated with each asset that is held in the portfolio. Components of realized return are expected return, changes in expectations about future cash flows and changes in expectations about future discount rate. Employing the calculation of realized return helps an investor make decisions about what assets to

Our investment approach is primarily focused around creating a portfolio with a relatively low risk level. Our portfolio will be diversified in a variety of investments in order to reduce the overall risk of the portfolio. We believe that diversification is an excellent way to build a portfolio that will increase the chances of a return and minimize the chances of a significant loss. Due to an increase in globalization, economies around the world are interacting with each other more than ever, causing the economies to be heavily influenced by each other. Due to the increased globalization and the uncertainty that surrounds the future, we prefer creating a long-term portfolio with a relatively low risk level.

Active investments – A portfolio structure based on share analysis, new information and risk/return preferences (fundamental and technical analysis to support investment decisions)

The objective of studying this case is to understand the concepts of diversification and the efficient frontier by analyzing Harvard Management Company’s application of portfolio theory for managing the endowment of Harvard University. Please read the case carefully and be prepared to discuss the following questions in class on Monday, October 11.

A __portfolio__ is a collection of financial assets or investments such as stocks, bonds, and cash. Portfolios can be held by either an investor, hedge funds, or a type of financial institution. __Risk tolerance__ is simply the amount of risk you are able to handle as an investor. The associated risk tolerance with a portfolio usually determines its design. When designing a portfolio, investors will always want to maximize return and minimize risk. However, as you may have heard, the higher the risk tolerance the the higher the return. Investors should always go with a risk tolerance that they are comfortable with both mentally and financially.