Finance School of Management Chapter 12: Choosing an Investment Portfolio Objective To understand the theory of personal portfolio selection in theory and in practice uesTc
1 Finance School of Management Chapter 12: Choosing an Investment Portfolio Objective • To understand the theory of personal portfolio selection in theory and in practice
Finance School of Management Chapter 12: Contents The process of personal portfolio selection The trade-off between expected return and risk Efficient diversification with many risky assets uesTc
2 Finance School of Management Chapter 12: Contents ❖ The process of personal portfolio selection ❖ The trade-off between expected return and risk ❖ Efficient diversification with many risky assets
Finance School of Management The Concept of portfolio A person's wealth portfolio includes Assets: stocks bonds, shares in unincorporated business, houses or apartments, pensions benefits, insurance policies, etc Liabilities. student loans. auto loans. home mortgages etc uesTc
3 Finance School of Management The Concept of ‘Portfolio’ ❖ A person’s wealth portfolio includes – Assets: stocks, bonds, shares in unincorporated business, houses or apartments, pensions benefits, insurance policies, etc. – Liabilities: student loans, auto loans, home mortgages, etc
Finance School of Management Portfolio selection A study of how people should invest their wealth optimally A process of trading off risk and expected return to find the best portfolio of assets and liabilities Narrow and broad definitions How much to invest in stocks bonds. and other securities whether to buy or rent ones house What types and amounts of insurance to purchase How to manage one's liabilities How much to invest in ones human capital uesTc
4 Finance School of Management Portfolio Selection ❖ A study of how people should invest their wealth optimally ❖ A process of trading off risk and expected return to find the best portfolio of assets and liabilities ❖ Narrow and broad definitions: – How much to invest in stocks, bonds, and other securities – Whether to buy or rent one’s house – What types and amounts of insurance to purchase – How to manage one’s liabilities – How much to invest in one’s human capital
Finance School of Management Portfolio selection Although there are some general rules for portfolio selection that apply to virtually everyone, there is no single portfolio or portfolio strategy that is best for everyone. uesTc
5 Finance School of Management Portfolio Selection ❖ Although there are some general rules for portfolio selection that apply to virtually everyone, there is no single portfolio or portfolio strategy that is best for everyone