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Unformatted text preview: ovided any new information.) 39 Coefficient of Variation­CV 40 Portfolio Theory So far we have explored the risk­return relationship in the context of a single asset. Now we are going to explore the effect on risk and return when an investor is managing a portfolio of assets, rather than just a single asset. A portfolio is simply a collection or group of assets. Portfolios can consist of, at one extreme, just a few investments held by individuals or, at the other extreme, of hundreds or even thousands of investments managed by the giant investment management funds. 41 Portfolio Theory For example, Barclays Global Investors (BGI)—the investment arm of Barclays Bank—is the second largest fund management business in the world after Fidelity, an American fund management organization. BGI manages over £230 billion of funds on behalf of charities, insurance companies and pension funds, etc. Now suppose, ‘just for an instant’, that you had a £1 million windfall on the lottery, what would you do with the money? Probably you would invest some of your new found wealth. Invest it in what kind of assets? Perhaps a proportion would go into a bank or building society deposit account(s). You may decide to invest in a new house, you may also decide to invest a proportion in a range of shares on the stock market. 42 Portfolio Theory Another proportion you may decide to invest in a longer­term savings scheme, purchase a work of art, and so forth. This diverse group of investments would be your asset or investment portfolio. It is unlikely that you would invest all your money in a single asset, as this would be the high risk strategy. Rather, your objective should be to create an efficient portfolio, that is one which will maximize your return for a certain level of risk, or alternatively minimize your risk for a required level 43 Portfolio Theory PT says that it is not enough to look at the expected risk and return of one particular stock. By investing in more than one stock, an investor can reap the benefits of diversification ­ chief among them, a reduction in the riskiness of the portfolio. PT quantifies the benefits of diversificatio...
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