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 above discussion demonstrates that asset is a tip in the portfolio. An investor never buys all securities of the financial market rather selects a combination of securities. This is when the concept of stake arises. Thus, portfolio theory has two important parameters weight of an asset in the portfolio and its peril. The concept risk relates to the reproduction on investment. Let us consider a single stock A. The stock A has predicted returns for different economic states as well as the opportunity of occurring these states. Theoretically three states are considered boom, average, and recession. Using formulas, one can calculate 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 specific 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, elevator car 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 Average predicted return = Weight of Auto stock x Predicted return + Weight of Gold stock x Predicted return.