Investing in different assets is a risky and challenging task of finance market. It is generally practiced with the concept of how much risk an investor is willing to take. For example, is an investor a high risk averter or low risk averter? It also depends upon the level of return and yield an investor is expecting from the investment and of course a time value of money. The allocation decision of the different instrument and assets also rely on the preferences of the investor regarding holding period of different types of investment securities.
Interest Bearing …show more content…
So when we choose new investments, we do it with an eye to what we already own and how the new investment helps us in achieving greater balance. For example, an investor might include some investments that may be volatile because they have the potential to increase dramatically in value, which other investments in his portfolio are unlikely to do.
Therefore, by approaching risk in this way—rather than always buying the safest investments— is being influenced by what's called modern portfolio theory, or sometimes simply portfolio theory. While it's standard practice today, the concept of minimizing risk by combining volatile and price-stable investments in a single portfolio was a significant departure from traditional investing practices.
In fact, modern portfolio theory, for which economists Harry Markowitz, William Sharpe, and Merton Miller shared the Nobel Prize in 1990, employs a scientific approach to measuring risk, and by extension, to choosing investments. It involves calculating projected returns of various portfolio combinations to identify those that are likely to provide the best returns at different levels of risk (FINRA,