Any collection of financial instruments like stocks, commodities, currencies, indices and futures is referred as portfolio which can be owned by an individual or a financial company.
While creating a portfolio one can use unlimited number of instruments combining and allocating as many assets as he wants. And the selection of assets again depends on investor’s will; it can be based on the expected return, as well as on macroeconomic factors.
Origins of Portfolio Investment
The notion of portfolio investment was firstly suggested by Harry Markowits who brought forward the idea of Modern Portfolio Theory (MPT). The basis of the theory is the allocation of assets in such a way as to maximize your profit and minimize the extent of risk. Here what you should take into account is the price changes of one asset relative to another asset in the given portfolio.
Based on the main concept of portfolio you can optimize your portfolio of assets meanwhile maximizing the returns and minimizing the risks of the portfolio. Therefore, as to make a good portfolio investment you should take into account to how the price of each security changes versus the price of other security involved in the portfolio instead of choosing securities individually.
The MPT suggests a great opportunity of investment diversification and is considered one of the best ways to invest money. Its main stress is put on proper reduction of unsystematic risk as a result of which the risk level of a portfolio will be lower than the average risk extent of separate securities included in it. Here the only requirement is to determine the proportion of each asset in order to promote the increase of return and decrease of risk. This balance will work for investors regardless the market state.
