Investment and Portfolio Management, Study notes of Investment Management and Portfolio Theory

Download Investment and Portfolio Management and more Study notes Investment Management and Portfolio Theory in PDF only on Docsity! I. UNIT TITLE/CHAPTER TITLE: CHAPTER IV II. LESSON TITLE : MODERN PORTFOLIO CONCEPT III. LESSON OVERVIEW This lesson provides the student an overview of the investment income and investment risk. In this lesson, the student will learn how to examine the return of each assets that might be expected to earn and the risk on that return. IV. LESSON CONTENT PRINCIPLES OF PORTFOLIO PLANNING Investors benefit from holding portfolios of investment rather than single investments vehicles. Without necessarily sacrificing returns, investors who hold portfolios can reduce risk. The risk of the portfolio may be less than the risks of the individual assets, the whole is less than the sum of its parts. Portfolio is a collection of investment assembles to meet one or more investment goal. PORTFOLIO OBJECTIVES The key point of portfolio objectives must be established before you begin to invest. The ultimate goal of an investor is an efficient portfolio, one that provides the highest return for a given level of risk. PORTFOLIO RETURN AND STANDARD DEVIATION The first step in forming a portfolio is to analyze the characteristics of the securities that an investor might include in the portfolio. The two most important characteristics to examine 1. The returns that each asset might be expected to earn and 2. The uncertainty surrounding the expected return. As the starting point, we will examine historical data to see what returns stocks have earned in the past and how much those returns have fluctuated to get a feel for what the future might hold. The return on a portfolio is calculated as a weighted average of returns on the assets (i.e., the investments) that make up the portfolio. You can calculate the portfolio return by using the equation. The portfolio return depends on the returns of each asset in the portfolio and on the fraction invested in each assets. Equation The table shows the historical annual returns on two stocks, International Business Machine (IBM) and Celgene (CELG) from 2005 to 2014. Over that period, IBM earned an average annual return of 9.0%. CELG earned a remarkable 40.7% annual return. Now suppose we want to calculate the return on a portfolio containing investment in both IBM and CELG. The first step in the calculation is to determine how much IBM and how much CELG to hold, that is, what weight each stock should receive in the portfolio. Let’s assume what we want to invest 86% of our money in IBM and 14% in CELG. What kind of return would such a portfolio earn?