INVESTMENT

PORTPOLIO
DEFINITION

What is the portfolio?

Any combination of financial risk such as stocks, bonds and cash

What is the investment portfolio?

a collection of assets owned by an individual or by an institution.
- The type of investment portfolio

Including market portfolio and the zero-investment portfolio

HOW TO FORM AN PROFITABLE PORTFOLIO

Step 1: Determining the Appropriate Asset Allocation for You

- AGE, Time to grow your investment, Fulfill future capital needs,
Amount of capital to invest, Risk tolerance
Step 2: Achieving the Portfolio Designed in Step 1
- Stock picking (sector, market cap and stock type),
Bond picking((coupon, maturity, the bond type and interest rate)
Mutual funds, Exchange, Trade funds
Step 3: Reassessing Portfolio Weightings
- Categorize the investment and determine their values' proportion.
- Analyze and rebalance your current financial situation,
future needs and risk tolerance.
Step 4: Rebalancing Strategically
- Diversification
How to choose the firm For investment

D invested totally 100 ( 50 for A, 30, for B, 20, for C)// (E : 20,50,30)
D expected return rate = (50 x 3.3% + 30 x 5.0% + 20 x 6.8%) /100 = 4.5% E(5.2%)
D expected risk rate = (50 x 1.1% + 30 x 11.6% + 20 x 31.2%) /100 = 10.3% E(15.4%)
The average return on investment A B C
Market situation
Recession probability : 30% 2% -10% -30%
Average probability : 40% 3% 5% 2%
Boom probability : 30% 5% 20% 50%
A expected rate of return B expected rate of return C expected rate of return
3.3% 5.0% 6.8%

A expected rate of return = (30% x2% + 40% x 3% + 30% x 5%) / 100% = 3.3%

A risk rate B risk rate C risk rate

1.1% 11.6% 31.2%
A risk = (30% x (3.3%-2%)2 + 40% x (3.3%-3%)2 + 30% x(3.3%-5%)2) = 1.1%

Risk premium
A = 3.3%(expected) - 3.0%( risk-free rate of return) = 0.3%/ B(2.0%),c(3.8%)

* A,B,C Firm / D,E - Person

How to allocate the asset

1 Time regression r2 can be used to analysis for different types of assets.

2 The return from a fund depends upon 3 factors

- The return from overall market management
- The incremental return from asset allocation policy
- The active returns through timing and selection

Than it comes to investment strategy and policy

- SELECT individual security within an asset class to get max. returns
- Strategically alter the asset mix
in order to gain short term returns (market timings)-
- Decide upon the normal or long term weight
for the different asset class in the portfolio.
THANKS