RISK PORTFOLIO MANAGEMENT

Risk Portfolio Management

Risk Portfolio Management

On a general level, investment managers and academic economists have long been aware of the necessity of taking returns as well as risk into account: "all your eggs should not be placed in the same basket". This is where the idea of holding a portfolio of shares comes from. Modern portfolio theory (MPT), or portfolio theory, was introduced by Harry Markowitz with his paper "Portfolio Selection" which appeared in the 1952 Journal of Finance. Thirty-eight years later, he shared a Nobel Prize with Merton Miller and William Sharpe for what has become a broad theory for portfolio selection. Portfolio theory explores how risk averse investors construct portfolios in order to optimise expected returns for a given level of market risk. The theory quantifies the benefits of diversification. Out of a universe of risky assets, an efficient frontier of optimal portfolios can be constructed. Each portfolio on the efficient frontier offers the maximum possible expected return for a given level of risk.

Finance basically deals with risk and expected return. Portfolio is one of the important factors of Finance. Certain amount of money invested in different assets like bond stocks or securities makes a portfolio of investments. This portfolio is about how can we reduce the risk and make better return through diversification. We have to create our portfolio that should have the mixture of both risk free and risky assets. Risk free assets are the bonds issued by government and some financial institutions, like Treasury bills, some bonds certified by government and so on. On the other hand most of the bonds; stocks are considered as risky assets. Returns of the risky assets depend on economical situation. There may be 3 kinds of situation in the economy like recession, normal and boom. Risk free assets always ...