Risk, return, risk aversion, diversification
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FINS5513 Lecture 1
Investment overview:
Risk, return, risk aversion,
diversification
2❑ 1.1 Constructing An Investment Portfolio
➢ Portfolio Basics
➢ Themes in Portfolio Management (Active/passive, traditional/alternative, growth/value)
❑ 1.2 Measuring Return and Risk
➢ Measuring Return (HPR, APR, EAR); Expected Returns
➢ Measuring Risk
➢ Sharpe Ratio
❑ 1.3 Risk Aversion and Investor Preference
➢ Preference, Utility, Risk aversion (mean-variance criterion), Indifference curves
❑ 1.4 Introduction to Modern Portfolio Theory
➢ Portfolio of risky assets
➢ Diversification
Lecture Outline
1.1 Constructing An
Investment Portfolio
FINS5513
4Portfolio Basics
FINS5513
5❑ A combination of multiple assets and/or securities owned by an investor
➢ The aim of owning multiple assets is to achieve diversification
❑ What asset classes are available?
➢ Real assets vs Financial assets
➢ Financial assets
❖ Equity securities
• Common stock and Preferred stock
• Share market indices
❖ Fixed income securities
• The money market
• The bond market
• Bond market indices
❖ Derivatives securities
What is a Portfolio?
6❑ A combination of multiple assets and/or securities owned by an investor
➢ The aim of owning multiple assets is to achieve diversification
❑ We will be analysing assets/securities both individually as well as in the context of a portfolio
➢ Say an investor owns stocks A and B and wishes to add C
• In an isolated approach, an investor would look at the benefits and costs of C individually
• In a portfolio approach, an investor would compare the benefits and costs of portfolio A+B
to portfolio A+B+C
❑ Investors construct portfolios to achieve diversification and avoid the risks of investing all their
capital into a single asset
➢ As we will see, diversification allows investors to reduce risk without reducing the expected
rate of return on a portfolio
What is a Portfolio?