Portfolio Risks and Returns

Question: Discuss about thePortfolio Risks and Returns. Answer: Introduction Portfolio investment deals with investing in the securities such as shares, bonds and debentures. In every investment there is a high chances of getting high returns, however, it also includes high risks to earn such high returns. The risk in investment is the probability of deviation of returns from that of standard return and it could be measured with the help of standard deviation of rate of return. In one of the video, it was mention that the risk associated with the portfolio securities is classified as the systematic risk and unsystematic risk. Harry Markowitz, The Father of modern Portfolio Theory, has mentioned in an interview with Eric Schurenberg, Editor Director of Moneywatch.com that portfolio diversification will help reducing the unsystematic risk, as the negative return on one security will be nullified by the positive return of the other security. Markowitz has won himself a Nobel Prize for economics in 1990 for providing the portfolio diversification model. He has explained that there should be precise portfolio management with efficient set of stocks that are often termed as the efficient frontier of risky assets. In the video where William F. Sharpe and Paul Costello are discussing about investment in Stanford University, it has been said in order to gain high gain, it is important to take big risks in financial investment as there are no short cuts to achieve high gains even if such high risks does not guarantee high returns. However, Paul Costello agreed that ignoring the risk versus return by people had led to the meltdown in banking community. They explained that diversification in portfolio using various assets such as shares and bonds may increase the chances that one of them will yield highest return. In mutual fund, the mutual fund team analyze the market, trends, and thus after a thorough study they make a portfolio of different stocks that would result is overall good performance of the portfolio. On contrary, an Index fund though is well-diversified fails to eliminate the volatility. As per the Markowitz model, investors should focus more on what to do rather predicting what they a ctually would do. Based on the theory Sharpes dissertation has provided an important concept of Capital Asset Pricing Model (CAPM). The portfolio management is the most crucial thing and must be dealt with care and complete understanding of the securities or the risk involved in the same. Any negligence could affect the return of the investors. It is not just important to understand the present scenario of the market but to analyse the future growth or fall of the market is also very important. As shown in one of the video, the case of Bear Stearns clearly shows how they claimed that the company is sound and the investors do not require withdrawing their investment, however, within next 6 days the market collapsed and caused huge loss to the investors. It becomes very important to analyse all the risk in order to be safe and get the estimated return.