The word “Portfolio” can be defined as; the totality of decisions determining an individual’sfuture prospects” (Sharpe, 1970). Portfolio can consist of many types of assets such as plant,
property, real and financial assets (P.A Bowen, 1984). Portfolio theories propose how rationaland prudent investors should use their due diligence to diversify their investments to optimizetheir portfolios, and how a risky asset should be priced as compared to less risky asset. Peoplehave been investing in the different assets class since decades but then they realize theimportance of risk and its negative implications, if not treated effectively. Every investor has his
own tolerance of risk and investor’s defines it in his ability of taking it. The portfo
lio theorieshave been derived over time in order to effectively measure the risk and how it can be reducedby diversify in their asset.
Article 1: “
The Legacy of Modern
This article covers the highlights of modern portfolio theory, describing how risk and its effectsare measured and how planning and asset allocation can help you do something about it. Modernportfolio theory is the theoretical conflicting of conventional stock picking. It is being putforward by the economists, who try to understand the phenomena of the market as a whole,instead of business analysts, who look for individual investment opportunities. Investments areexplained statistically, as how much investor expected long-term return rate and their expectedshort-term volatility. It measures how much expected return can deviate much worse thanaverage an investment's bad years are likely to be. The goal of the theory is to identify youradequate level of risk tolerance, and then to come up with a portfolio with the maximumexpected return for that level of standard deviation (risk).The portfolio it assumes that the investment universe consists only of two market securities, therisk free asset and risky assets. But the actual investment universe is much broader than thatbeing put forward. The optimal level of investment is to invest on efficient frontier but doing thiswould mean to calculate the millions of covariance among the securities. This calculation couldmake the life of analyst as difficult as one could ha
ve ever imagined. To think practically, it’s
better to put portfolio theory to work means investing in a limited number of index securitiesrather than a huge number of individual stocks and bonds. Index investing is the point the whereportfolio theory starts to rely on the efficient market hypothesis. When you buy an index basedportfolio strategy you're allocating your money the same way the whole market is - which is ahigh-quality thing if you believe the market has a plan and it is efficient. This is why portfoliotheory is one of the branches of economics rather than finance: instead of only studying financialstatements and different financial ratios, you study the aggregate behavior of investors, some of whom seemingly
studied financial statements so that market valuations will reflect theirdue diligence and prudence.
Article 2: “
Theory of portfolio and risk based on incremental entropy
The article has used incremental entropy to optimize the portfolios. This novel portfolio theoryhas been based on incremental entropy that carries on some facet
of Markowitz’s (1959, 1991)
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