This lecture note gives you a comprehensive and easy to understand insight on Portfolio theory.
PORTFOLIO THEORY
This can be defined as a basket of investment, it can also be defines as a collection of various investment that make up an investor’s total investment. For example: Mr. Kuye invested in UBA plc, Royal exchange Insurance Plc., Cadbury Nig. Plc. and Nig. Plc. the above mention investments constitute Mr. Kuye investment portfolio. It must be noted that a portfolio must consist at least two different investments or securities.
Portfolio Theory: This can be defined as the way and manner, in which a portfolio is selected with the aim of reducing, eliminating decreasing, minimizing the risk in the given portfolio.
Optimal Portfolio: Is a portfolio of securities in which for a given risk has the highest expected return and for a given expected return has lowest risk.
Portfolio Return: This can be defined as the weighted average return of all securities or investment in a given portfolio, where the weight represents the proportion of each security in a given portfolio. Portfolio return of a given portfolio can be estimated using the formula stated below:
(R ) wt (Rt )
n
t
p Σ = Σ Σ=1
Where: E(Rp) = Expected return of a portfolio
Wt = Weight or proportion of total funds invested in Security t
E(Rt) = Expected return of security t
N = Number of security in the portfolio.
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