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investment chapter 5.1 (what is portfolio (portfolio (is a collection of…
investment chapter 5.1
what is portfolio
portfolio
is a collection of investments assembled to meet one or more investment goals.
Growth-Oriented Portfolio
primary objective is long-term price appreciation
Income-Oriented Portfolio
primary objective is to produce regular dividend and interest income
portfolio return & risk measures
The return on a portfolio is simply the weighted average of the individual assets’ returns in the portfolio
The standard deviation of a portfolio’s returns is more complicated, and is a function of the portfolio’s individual assets’ weights, standard deviations, and correlations with all other assets
an efficient portfolio
A portfolio that provides the highest return for a given level of risk
Requires search for investment alternatives to get the best combinations of risk and return
return on portfolio
correlation: why diversification works
correlations
is a statistical measure of the relationship between two series of numbers representing data
Positively Correlated
items tend to move in the same direction
Negatively Correlated
items tend to move in opposite directions
Correlation Coefficient
is a measure of the degree of correlation between two series of numbers representing data
Perfectly Positively Correlated describes two positively correlated series having a correlation coefficient of +1
Perfectly Negatively Correlated describes two negatively correlated series having a correlation coefficient of -1
Uncorrelated describes two series that lack any relationship and have a correlation coefficient of nearly zero
The lower the correlation the more the overall risk in a portfolio is reduced
Assets with +1 correlation eliminate no risk
Assets with less than +1 correlation eliminate some risk
Assets with less than 0 correlation eliminate more risk
Assets with -1 correlation eliminate all risk