Key Issues Relative to Portfolio Analysis and Investment
Abstract
This essay is concerned with understanding the key issues relative to portfolio analysis and investment. The scope of this essay will be limited to the U. S. Stock markets only. This essay will be built upon extant portfolio theory and will discuss different types of risks that investors might face and how they go about managing such risks. Under consideration will be topics such as efficient frontier and optimal portfolios as well as their relevance to investment theory, under the assumption of direct investment in the stock market.
DETERMINING THE PURPOSE OF YOUR INVESTMENT One of the steps in building an investment portfolio is to establish investment goals. Investment goals are the financial objectives you wish to achieve by investing (Gitman and Joehnk, 2005). In other words, what you want these investments to do for you or why you are investing in the first place. Some common investment goals include (Gitman, et al, 2005): 1) accumulating retirement funds, 2) enhancing current income, 3) saving for major expenditures, or 4) sheltering income from taxes. To get an estimate of the securities suitable for certain levels of risk tolerance and to maximize returns, investors should have an idea of how much time and money they have to invest and the returns they are looking for (Investopedia.com, 2006). MODERN INVESTMENT THEORY Modern Investment Theory also known as Modern Portfolio Theory (MPT) was introduced by Harry Markowitz with his paper "Portfolio Selection," which appeared in the 1952 Journal of Finance (riskglossary.com, 2006). Prior to Markowitz 's work, investors focused on assessing the risks and rewards of individual securities that offered the best opportunities for gain with the least risk and then construct a portfolio from these (riskglossary.com, 2006). MPT is defined, according to investorwords.com (2005), as an overall investment strategy that seeks to construct an optimal portfolio by considering the
This essay is concerned with understanding the key issues relative to portfolio analysis and investment. The scope of this essay will be limited to the U. S. Stock markets only. This essay will be built upon extant portfolio theory and will discuss different types of risks that investors might face and how they go about managing such risks. Under consideration will be topics such as efficient frontier and optimal portfolios as well as their relevance to investment theory, under the assumption of direct investment in the stock market.
DETERMINING THE PURPOSE OF YOUR INVESTMENT One of the steps in building an investment portfolio is to establish investment goals. Investment goals are the financial objectives you wish to achieve by investing (Gitman and Joehnk, 2005). In other words, what you want these investments to do for you or why you are investing in the first place. Some common investment goals include (Gitman, et al, 2005): 1) accumulating retirement funds, 2) enhancing current income, 3) saving for major expenditures, or 4) sheltering income from taxes. To get an estimate of the securities suitable for certain levels of risk tolerance and to maximize returns, investors should have an idea of how much time and money they have to invest and the returns they are looking for (Investopedia.com, 2006). MODERN INVESTMENT THEORY Modern Investment Theory also known as Modern Portfolio Theory (MPT) was introduced by Harry Markowitz with his paper "Portfolio Selection," which appeared in the 1952 Journal of Finance (riskglossary.com, 2006). Prior to Markowitz 's work, investors focused on assessing the risks and rewards of individual securities that offered the best opportunities for gain with the least risk and then construct a portfolio from these (riskglossary.com, 2006). MPT is defined, according to investorwords.com (2005), as an overall investment strategy that seeks to construct an optimal portfolio by considering the
References: Gitman, L. J. & Joehnk, M. D. (2005) Fundamentals of investing. 9th ed. Upper Saddle River, NJ: Pearson Education International. Investorwords.com (2005). Modern portfolio theory. Retrieved February 14, 2006 from http://www.investorwords.com/3083/modern_portfolio_theory.html Riskglossary.com (2006). Portfolio theory. Retrieved February 14, 2006 from http://www.riskglossary.com/link/portfolio_theory.htm Little, K. (2006). Types of investment risks. Retrieved February 15, 2006 from http://stocks.about.com/od/tradingbasics/a/Typesrisk120704.htm Wikipedia.com (2006). Modern portfolio theory. Retrieved February 15, 2006 from http://en.wikipedia.org/wiki/Modern_portfolio_theory Investopedia.com (2006). Risk and diversification. Retrieved February 15, 2006 from http://www.investopedia.com/university/risk/risk4.asp Croome, S. (2005). Achieving optimal asset allocation. Retrieved February 15, 2006 from http://www.investopedia.com/articles/pf/05/061505.asp