Risk and Return Tradeoff Memo

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RUNNING HEAD: RISK Risk and Return Tradeoff Memo The process of portfolio construction can be quite complex. Analysts go through reams of statistics – past performance, future potential, and industry knowledge and rely on personal insights into the market to arrive at the final list (UOP, 2009). Every investor aims to maximize returns while minimizing risk. Individual securities must be evaluated not only on the risk-return trade-off in isolation but also on their contribution to the risk-return tradeoff of the entire portfolio. This memo will be based on the Constructing and Managing a Portfolio Simulation that details the fundamentals of portfolio construction in relation to the risk-return tradeoff and the relationship…show more content…
The higher the Sharpe ratio is for a given portfolio, the better a portfolio’s risk-adjusted performance will be. Investment Strategy Recommendations Using the stock market to invest in securities can be risky but with a little research and a carefully thought out investment strategy the road to financial security can be successful. Portfolio selection is a critical step in the investment process when deciding on which securities and stocks to purchase. When investors are selecting securities for a portfolio, the risks and returns must be considered for each individual stock in addition to the risks and returns for the portfolio as a whole. When looking at stock risks, both beta and unsystematic risk should be taken into consideration. When high return stocks have a beta greater than one, this means these stocks are highly volatile in comparison to the overall market and prove to be more risky. Stocks with high unsystematic risk are likely to have changes in stock prices. It is recommended to continue diversifying the stock selection and the allocation of funds to avoid industry risks, or beta. Industry risks often affect all stocks in a given industry. It is also recommended to continually evaluate the company’s investment portfolio as market conditions and future trends can sometimes be unpredictable. In the event that the economy becomes unstable and the

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