Portfolio of Potential Investment - Essay Sample on Investments

The portfolio is defined as the totality regarding all the decisions undertaken by an individual to determine their prospects. There are different types of the portfolio such as real, plant and property assets (Buisseret, Cameron and Georghiou, 1995 p 580). Various theories have been discussed on how investors rationalize their due diligence to diversify their investments so that they are capable of optimizing theory portfolios. Investors are very particular on how to rank the risky assets in comparison to the less risky assets. Over the years people have been undertaking investments in different assets, and over time there has been a realization of the importance to conduct a risk assessment and evaluate the probable negative impacts. Every investor has their tolerance for a risk they are willing to take and the investors ability to undertake the identified risks. Furthermore, a risk is recognizing the importance to be more of a subject matter depending on different analysts and investors measurers (Brueggeman, Chen, and Thibodeau, 1984 p 340 ). In todays world not even a single investor can underestimate the importance of risk in selecting a different kind of security. Moreover, investors have emphasized on the need to have a diversified portfolio through the proper portfolio selection process. Therefore, to reduce the identified risks impacts, statistical measures have been developed to calculate the risks. Thus, the method selection on the reduction of risks is limited to the understanding of the investors and the expected useful results by the investor.

Evidently, there is an assumption that is developed in investing, namely when there is higher degree of risk that is anticipated then higher potential returns are imminent. According to Markowitzs theory, there is a defined balance that can come into existence between risks and returns (Buisseret, Cameron and Georghiou, 1995 p 580). However, this is not necessarily true as there is evidence of high-risk investments but the attained profits are not necessarily high. Therefore, optimal portfolio aims to ensure a balance is achieved between the most significant potential returns with a bare minimum or acceptable degree of risk in the identified security. Thus optimal portfolio redefines dangers as the degree of risks.

Portfolio theories and methods have been developed keenly to assist the investors to make certain kinds of decisions and adequately efficiently allocate their money (Buisseret, Cameron and Georghiou, 1995 p 580). Despite the various evaluation methods indicated there is a tendency of people agreeing on the use of expected return as a representation of the future earnings is one of the most critical factors that all the investors consider before undertaking a project. Moreover, there is an established positive relationship established between the expected risk premiums with the predictable level of volatility of an investment (Buisseret, Cameron and Georghiou, 1995 p 580). Evidently, there is a healthy direct relationship between the levels of returns an investor expects with the amount of risk the investor is willing to peach. Often investors are eager and ready to invest they are sure they will be capable of making significant returns. However, in the event, the gains are not promising the investors are sure if the same opportunity is exploited again in the future, the probability of the investors to make a higher margin in profits is higher. Thus they are willing to settle for connection and non-monetary returns at the moment. Currently, many investors are particular on the kind of performances they expect. Majority of who are interested in the amount of money investment is capable of returning.

Modern portfolio theory has analyzed rational investors are noted to use diversification to optimize their investment portfolio and explain the risky pricing assets to select (Driessen and Laeven, 2007 p 1700). Moreover, the approach explains investors are likely to always settle for an investment that possesses less number of risks. An investor who expects high returns is supposed to be willing to accept high risks. Therefore, the average trading off between expected returns evaluated about the dangers the investor is willing to undertake. In the efficient frontier curve, there is an examination of different sets of the portfolio on the expected maximum rate of return of any risk taken. Ideally, the investors are expected to undertake a business venture based on not only their risk aversion but also on their view regarding the risk and return relationships. The efficient frontier is made up of the portfolio rather than individual assets. Therefore, an investor can hold assets are imperfectly correlated. This gives the investors an opportunity to reduce risks that are associated with every personal risk by keeping different kinds of assets. Additionally, investors are known to select a point on the efficient frontier based on the utility function.

Investors can be devoted to select almost same kind of portfolio as they consider each portfolio based on the probability of the distribution of the expected returns for their investments over a specified period (Driessen and Laeven, 2007 p 1700).. The expected rates of return for a given portfolio of investments are noted to be the weighted average of the expected return on every specific investment in the portfolio. In recent times there is the need for the investors to ensure they diversify their investments to not only reduce risks but also have a better opportunity to make more profits. Example, technology is noted to be the most promising element that all the investors need to consider while investing. Therefore, many investors had taken a step further and ensured they are capable of spending in different sections of technology so that they are not only able to tap in many returns but also the future is noted to be unpredictable in technology thus the risks are significantly high.

Investors are also noted to have the same kind of investment options as they aim to maximize their allocated utility for a specific period. Therefore, the utility curve that is developed illustrates the diminishing marginal wealth utility (Yang, Narayanan, and De Carolis, 2014 p 2000). For many investors, risks are considered to be the uncertainty of future outcomes. Therefore, the measure of risk is the probability of an adverse outcome. In reality, investors are very cautious of the future trends set. Consequently, many of the investors have a tendency not to go all risky in their selections. There are some investment options considered by the investors that are of low risks thus, despite the fact that the investments not being of high return they are sure the dangers expected are few. Therefore, despite the investors making investment choices, they do not go all overboard by only picking very high returns projects many of them are cautious on how in case of risks are capable of covering the loses.

For a given expected return level on investments done, the investors are noted to prefer less risk in comparison to more risks. However, for a specified level of risk, the investors are willing to take higher risks as the expected returns are high. Under these circumstances, assets are considered to be optimal and can considerably offer the investors a high performance with less chance (Adjaoute and Danthine, 2004 p 1230). Moreover, with specified risks, the investors are capable of predicting what to expect in the future or upon investment. Therefore, the investors are given an opportunity to lay down some mitigation choices to ensure they do not have a high margin of loss. However, many investors are often not willing to make considerable investments in uncertain investments despite them having promising returns. Example if a risk-seeking investor were to use the efficient frontier to select on the kind of investments to undertake then there is a high probability of the investor selecting securities that are located at the right end of the efficient frontier. For the high-risk tolerant investors, there is a high likelihood of them deciding on investments that are located at the right end of the identified dynamic frontier. However, for the investors who are risk-averse investors, they are expected to pick on the securities that lie on the left side of the efficient frontier.

Many investments are noted today to make investment decisions regarding real estate. Investors today are not only confined only to local real estates, but also they have diversified to the international market (Inderst and Stewart, 2014 p 36). Furthermore, it is almost irrational and impossible to ensure they find some of the most efficient ways to expand a portfolio through the inclusion of real assets as the separate asset. Based on the real estates being highly uncorrelated even within the real estate industry, Investors in the future are expected to be keen on the ever-changing trends in the industry. Therefore, given the unpredictability in the market of real estates, many investors are noted to take extra caution. Indeed there are high returns in the industry but have high risks. Moreover, many investors in the real estates sector are observed to be very keen in their operations as they have to adjust to the new trends in the market and they can either make a positive or negative profit in the industry.

The investment universally is assumed to comprise of two market securities, the risk-free asset, and the risky assets (Breeden, 2005 p 80). However, this is different in the real world there is a much broader opportunity presented than what is being put forward. Therefore, the optimal level of investment is to ensure invest on the efficient frontier but this entails calculation of millions of covariance among different assets. Moreover, comparing at least three various efficient frontiers allows the investor to identify the right kind of stock portfolio, and this can potentially increase the number of returns under the same risk level established. Despite the risk measurement not being the same for the mean-variance model and that of the mean-LPM model the conclusion by the investors to use multi-type asset investment portfolio gives the investors an opportunity to reduce the identified risks. Investment of in any single market is noted not to get the expected rate of return under quoted acceptable risk levels. Example the Chinese stock market during the 2007-2008 is identified to have suffered a considerable volatility and it resulted in many investors making significant losses (Haran et al., 2016 p 480). Currently, the investors have learned from the Chineses market losses, and they have advanced to the allocation of funds into different markets around the globe. This gives the investors an opportunity to enjoy a multi-type asset investment portfolio which has significantly low risks and is capable of producing the desired high risks (Janda, Rausser, and Svarovska, 2014 p 680). Alternatively, investors are choosing to invest in both now and future markets, they have ensured they have mastered this by paying close attention to the less correlated stocks for them to have diversified non-systematic risks.

Indeed many investors have used the efficient frontier as their guidelines on the kind of investment to undertake (Phylaktis and Ravazzolo, 2005 p 80). However, several critics have been raised regarding the portfolio theory which has many assumptions that may not adequately be represented in the real world. The first assumption done by the investors is that the asset returns are expected to follow a normal distribution. However, this is not the case in the real business world as securities are expected to have more than three outcomes in their standard deviation. Second, the...