Answer to Question #161472 in Economics for Ackelia

Question

 How is the expected return of a portfolio related to the expected returns of the stocks in the portfolio?

Answer 1

There are many types of portfolios, and each individual holder adheres to his own investment strategy. The type of portfolio is determined depending on the ratio of return and risk. At the same time, an important feature when classifying a portfolio is how and from what source it was obtained: due to the growth of the market value of a security or due to current payments - dividends, interest.

Depending on the source of income, a portfolio of securities can be a growth portfolio or an income portfolio.

The growth portfolio is formed from stocks of companies whose market value is growing. The purpose of the portfolio is to increase capital value along with receiving dividends. There are several types of growth portfolios.

An aggressive growth portfolio aims to maximize capital gains. This includes stocks of young, fast-growing companies. Investing in stocks is quite risky, but it can bring the highest returns.

The portfolio of conservative growth is the least risky and consists of shares of large companies. The composition of the portfolio is stable for a long time, aimed at preserving capital.

A medium-sized portfolio combines the investment properties of portfolios of aggressive and conservative growth. Along with safe securities, this includes risky stock instruments. At the same time, average capital growth and a moderate degree of investment risk are guaranteed. This is the most popular portfolio among risk-averse investors.

The income portfolio is focused on obtaining high current income - interest and dividend payments. Several types of portfolios are also distinguished here:

- portfolio of regular income - formed from highly reliable securities and brings average income with minimal risk;

- portfolio of income securities - consists of high-yield corporate bonds, securities that bring high income with an average level of risk.

Growth and income portfolios are formed in order to avoid losses in the stock market both from a fall in market value and from a decrease in dividend payments.

When developing an investment strategy, it is necessary to take into account the state of the securities market and constantly evaluate the investment portfolio, timely purchase high-yield securities, and get rid of low-yield assets as quickly as possible. Therefore, there is no need to try to cover all the variety of existing portfolios, it is only necessary to determine the principles of their formation.

Thus, the assessment of the investment portfolio is the main criterion for making strategic decisions on the purchase or sale of securities.

Portfolio return

A portfolio of securities is a collection of different securities, and its yield can be determined using the following formula:

Portfolio yield = (Price of securities at the time of calculation - Price of securities at the time of purchase) / Price of securities at the time of purchase.