A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts, including mutual, exchange-traded and closed funds. Portfolios are held directly by investors and/or managed by financial professionals. Prudence suggests that investors should construct an investment portfolio in accordance with risk tolerance and investing objectives. In the present scenario the portfolio comprises of two Assets, asset A and asset B are combined into a portfolio with the weight in asset A ranging between 0 and 1 in increments of 0.10 and the weight in asset A ranging between 1 and 0 in increments of 0.10 respectively. Considering all the option of portfolio we have calculated in each option Expected
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Firstly, Systematic risk and secondly, Unsystematic risk. Systematic risk refers to the variability of return on stocks or portfolio associated with changes in return on the market as a whole. It is that part of variance of stock which arises because of economy wide factors such as changes in the nations’ economy, tax reform by the government o change in the world energy situation. No matter how many stocks you hold in your portfolio, systematic risk cannot be killed by diversification. Hence it is called non-diversifiable risk. This risk is also known as market risk. There is a reward for bearing this risk and such reward is risk premium i.e. …show more content…
For example, a portfolio comprising of 60% investment in Stock A and 40% investment in Stock B.Return from Stock A and Stock B are 20% and 30% respectively. Portfolio return will be 60% * 20% + 40% * 30% = 24%. So, return of portfolio is weighted average of stock but risk of portfolio is less than weighted average because there are benefits of diversification. Higher the expected return, higher the utility of investor and higher the risk, lower the utility of investor. For example, investing in a start-ups company carries substantial risk since there is no guarantee that it will be profitable. But if it is, you are in a position to realize a greater gain than if you had invested a similar amount in an already established company. So the best project is the one with the highest expected return and lowest risk. However this is not possible in well functioning financial market. We will find that higher return comes at the expense of higher risk. So, there is a direct relationship between risk and return.
Optimum projects depend on person to persons depending on their acceptability of risk but efficient project are same for all. We will choose efficient project as the one having lowest co - efficient of variation (CV). CV = (Standard Deviation/Expected return) *
Firstly, Systematic risk and secondly, Unsystematic risk. Systematic risk refers to the variability of return on stocks or portfolio associated with changes in return on the market as a whole. It is that part of variance of stock which arises because of economy wide factors such as changes in the nations’ economy, tax reform by the government o change in the world energy situation. No matter how many stocks you hold in your portfolio, systematic risk cannot be killed by diversification. Hence it is called non-diversifiable risk. This risk is also known as market risk. There is a reward for bearing this risk and such reward is risk premium i.e. …show more content…
For example, a portfolio comprising of 60% investment in Stock A and 40% investment in Stock B.Return from Stock A and Stock B are 20% and 30% respectively. Portfolio return will be 60% * 20% + 40% * 30% = 24%. So, return of portfolio is weighted average of stock but risk of portfolio is less than weighted average because there are benefits of diversification. Higher the expected return, higher the utility of investor and higher the risk, lower the utility of investor. For example, investing in a start-ups company carries substantial risk since there is no guarantee that it will be profitable. But if it is, you are in a position to realize a greater gain than if you had invested a similar amount in an already established company. So the best project is the one with the highest expected return and lowest risk. However this is not possible in well functioning financial market. We will find that higher return comes at the expense of higher risk. So, there is a direct relationship between risk and return.
Optimum projects depend on person to persons depending on their acceptability of risk but efficient project are same for all. We will choose efficient project as the one having lowest co - efficient of variation (CV). CV = (Standard Deviation/Expected return) *