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?
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?
