Discussion of Portfolio Theory Coursework Example | Topics and Well Written Essays - 750 words - 1

Discussion of Portfolio Theory - Coursework ExampleCorporate investors use the same concept when they build up a portfolio. The in a higher place discussion demonstrates that asset is a weight in the portfolio. An investor never buys all securities of the monetary market rather selects a combination of securities. This is when the concept of risk arises. Thus, portfolio hypothesis has two important parameters weight of an asset in the portfolio and its risk. The concept risk relates to the return on investment. Let us consider a adept parentage A. The stock A has predicted returns for different economic states as well as the probability of occurring these states. Theoretically three states are considered boom, average, and recession. Using formulas, one can guide expected return, E (rA), and risk of the return of the stock A. The risk of return is expressed through standard deviation , and in percentage. A portfolio consists of multiple financial instruments, each of them with s pecific predicted returns. Let us now say, we have three securities in a portfolio stock B, stock C, and stock D. The portfolio return will be E (r portfolio) = WB x E (rB) + WC x E (rC) + WD x E (rD). The value of E (r Portfolio) will compensate the risk of each single security.A portfolio consists of Gold Stock, Auto Stock with relative weight 75 % and 25 %. The return is shown below. Convert predicted returns of two stocks to the return of one average stock. The formula is number predicted return = Weight of Auto stock x Predicted return + Weight of Gold stock x Predicted return.