Portfolio Management

Portfolio Management

Abstract

In this paper, it will discuss over portfolio investment and management starting with emphasize on relationship between risks and return, highlights ways of diversification of portfolio in minimizing risks and discusses over efficient frontier concepts. It also discusses over ideal portfolio with an economic outlook of future.

Introduction

Portfolio Management is the art of allocating funds to various asset classes in expectation of getting maximum return with minimum amount of risk. It is the responsibility of Investment Advisor to assess the risk appetite of the investor and allocate resources accordingly. The investment advisor must assess the objectives and needs of the investor before making a final decision about the investment. Portfolio consists of many assets including low to high risk securities like Government Securities, Bonds, Stocks, Mutual funds etc. Relationship between risk and return should be maintained in such essence that it gives maximum return within a portfolio managed by an investor.

Discussion

Relationship between Risk and Return

In context of financial relationship, relationship between risk and return is a major concept that influenced expected rates of return with every existing asset investment. The Risk-Return has positive or direct relation when it is evident higher risk with higher returns which compensate for higher risk it assessing towards it. Conversely, this relationship will be characterized as negative or indirect when investors has relatively lower levels of risks so as it is exposed with lower returns. This relationship is of high concern for business managers and individual investors. Every businessman and individual investors is of concern that they should be compensated for higher risk with higher rate of returns. As, returns relates to the degree of risk associated with the investment, investors required to be able to identify amount of return is significant for a particular level of risk. All of this process is regarded to be as “pricing the risk”.

Asset pricing theory can be used to identify the relationship between return and risks in securities. The return of a security or an asset is equal to the risk-free return added with market premium risk (market return over risk-free return) and multiplied by beta (asset's systematic risk). This can be shown mathematically as follows:

r = rf + b (rm - rf)

Formulation of Portfolio that minimizes risk and maximize rate of return

Portfolio is regarded to be collection of all investments retain by an institution or individual which includes stocks, bonds, real estate, metals, and global funds. In order to minimize risks and maximize rate of returns it is required by an investor to maintain diversified portfolio. An investor should be aware of risk associated with each asset. It is required to maintain assets with less correlation to each other so as to compensate fall in one stock with another stock investment. Efficient portfolio is comprises of investments that gives higher return on investment and minimize risks which requires to calculate the risks and returns of a portfolio and finding ways of reducing risks through diversification.

Investment Diversification in an Investor Portfolio

Investment diversification in an investor ...