PORTFOLIO THEORY

[Virtual Presenter] Good evening everyone, Today, we'll be exploring the fundamentals of Portfolio Theory. We will discuss the core principles, calculation methods, types of risk, diversification benefits, graphical representation of the optimal portfolios, and the importance of understanding the correlation between assets in order to construct suitable portfolios. So let's get started!.

[Audio] Portfolio theory is a modern form of financial analysis which focuses on the structure of a portfolio and the correlation between different assets. It aims to assist investors in selecting a portfolio that meets their specific investment needs and risk preferences. It analyses the overall risk, return, and performance of the portfolio in order to make informed decisions and help investors manage their investments effectively. Through portfolio theory, investors can maximize their returns and minimize their risk, thereby making the most out of their investments..

[Audio] Portfolio diversification is at the heart of Markowitz Portfolio Theory, as it is the most effective way to reduce risk in the long term and increase returns. Diversification minimizes effects of unsystematic risks, allowing an investor to focus on the systematic risks that are more predictable and easier to manage. Through diversified investments across different asset classes, investors are able to construct portfolios that meet their financial objectives..

[Audio] Calculation methods are fundamental components of modern portfolio theory, which involve expected returns. These returns are typically estimated through either historical data analysis or forecasting based on economic indicators. Having a precise estimation of the portfolio's return is critical to guarantee its performance..

[Audio] Risk is an essential part of portfolio theory, split into two main categories: Systematic or Market risk, and Unsystematic or company-specific risk. Standard Deviation, a measure of potential variability of returns, is used to gauge risk. Grasping the risks associated with a portfolio is a must for any investment decision..

[Audio] Portfolio Theory allows for insight into the connection between various assets. It is possible to recognize the links between these assets, which may be either positive or negative. When the correlation between two assets is negative, this can contribute to the mitigation of risk in a portfolio. Additionally, diversification of a portfolio by blending assets with low correlation prometes greater stability and, consequently, a lower risk in investing..

[Audio] The efficient frontier is a graphical representation of the optimal portfolios given a set of constraints. It plots expected return against risk, showing the portfolio with the highest expected return for a defined level of risk, or the lowest risk for a given level of return. Any portfolios below this line are considered to be suboptimal. By understanding the efficient frontier, investors can better understand the balance between risk and reward when making investment decisions..

[Audio] Investors have differing objectives regarding their portfolios. It is crucial to take into account how their inclinations, e.g. risk tolerance, can shape their investment plans to achieve those goals. Modern Portfolio Theory investigates the equilibrium between risk and return when forming an investment portfolio, assisting investors in finding an appropriate balance depending on their personal preferences and assets..

[Audio] CML is an important idea in portfolio theory. It builds on the efficient frontier by factors in the risk-free rate and uniting it with high-risk investments in order to form the best portfolios. The CML enables investors to create diversified portfolios with a heightened expected return and minimum risk. It takes into consideration the investors' ambitions and risk appetite while giving a straightforward way to build an ideal portfolio..

[Audio] Portfolio theory is an important tool for investors when constructing portfolios. It involves combining different assets with different risk-return profiles to achieve specific investment goals and adjusts for the investor's risk tolerance. Asset allocation strategies are used to determine the mix of assets required to meet those goals and rebalancing and monitoring are used to track the performance of the portfolio and make necessary adjustments..

[Audio] Portfolio theory is often relied on to make investing decisions. However, there are some potential challenges to consider. The theory makes assumptions about expected returns and risk which may not always hold up in reality. Additionally, small changes to input data can result in substantially different portfolio suggestions. Finally, critiques around behavioral finance can also arise with regards to portfolio theory. It's important to think about these issues when making decisions..

[Audio] MPT is an essential aspect of investing, and showcasing portfolio portfolios is an effective way to demonstrate its utility. We can use historical or simulated data to track portfolio performance and observe any variations or discrepancies. Additionally, we can evaluate how portfolios built with MPT principles measure up over time and determine if there is any meaningful advantage or disadvantage to using MPT. To truly appreciate the merits of MPT, it's best to look at practical examples and explore how it can help us achieve successful investing..

[Audio] Concluding our presentation on portfolio theory, I hope you have gained greater appreciation for diversification, risk management, and the efficient frontier as essential elements of modern investment strategies. MPT continues to serve as a fundamental basis for current investment strategies, and it remains a rapidly developing field. Thank you..