portfolio

here a portfolio is the combination of investment in financial assets. the portfolio is the holding of securities and investment in financial assets. ie. bonds stock. portfolio management is related to the efficient portfolio investment in financial assets. if a person holds the stock of two different companies, such holding is called two stock portfolio. in the previous section of this chapter we studied the riskiness of a stock held in isolation. here, we analyze the degree of risk of stock held in portfolio. a stock held as a part of portfolio is less risky than the same stock held in isolation. so an individual investor can reduce the degree of risk of holding the stock in portfolio. such investors are not interested in the risk and return on a particular single stock. they are interested in risk and return of an individual security, in term's of how it affects the risk and return if the portfolio in which it is held in other words , the investor attempts to minimize the risk by making a portfolio which ultimately raises the value of her/his investment. the basic portfolio model was developed by harry markdown, who drives the expected rate of return for a portfolio of assets an expected risk measure. the markdown model is based on several assumptions regarding investor behavior:
(1) investors consider each investment alternative as being represented by a probability distribution of expected returns over some holding period.
(2)investor maximize one-period expected utility and their utility curves demonstrate diminishing marginal utility of wealth.
(3)investors estimate the risk of the portfolio on the basis of the variability of expected returns.
(4)investors base decisions solely on expected return and risk, so their utility curves are a function of expected return and the expected variance of returns only.
(5) for given risk level, investors prefer higher returns to lower returns. similarly for a given level of expected return, investors prefer less risk to more risk .
under these assumptions , a single assets or portfolio of assets is considered to be efficient if no other assets or portfolio of assets after higher expected return with the same risk, or lower risk with the same expected its risk and return. we must first be able to calculate the risk and return of a portfolio. we will deal with portfolio return first.