Lecture 12 Portfolio Opportunities and Choice refer to chapter 12 THE COURSE OF FINANCE 2017 SPRING SJTU
Lecture 12 Portfolio Opportunities and Choice refer to chapter 12 THE COURSE OF FINANCE 2017 SPRING SJTU 1
Chapter 12 Contents 12.1 The process of personal portfolio selection 12.2 The trade-off between expected return and risk 12.3 Efficient diversification with many risky assets THE COURSE OF FINANCE 2017 SPRING SJTU 2
Chapter 12 Contents 12.1 The process of personal portfolio selection 12.2 The trade-off between expected return and risk 12.3 Efficient diversification with many risky assets THE COURSE OF FINANCE 2017 SPRING SJTU 2
Objectives To understand the process of personal portfolio selection in theory and practice THE COURSE OF FINANCE 2017 SPRING SJTU 3
Objectives To understand the process of personal portfolio selection in theory and practice THE COURSE OF FINANCE 2017 SPRING SJTU 3
Introduction How should you invest your wealth optimally? Portfolio selection Portfolio selection is the study of how people should invest their wealth;it is also a process of trading off risk expected return to find the best portfolio of assets liabilities Your wealth portfolio contains Narrower dfn:consider only securities Ex.stocks, bonds Wider dfn:house purchase,insurance,debt Broad dfn:human capital,education THE COURSE OF FINANCE 2017 SPRING SJTU 4
Introduction How should you invest your wealth optimally? Portfolio selection Portfolio selection is the study of how people should invest their wealth; it is also a process of trading off risk & expected return to find the best portfolio of assets & liabilities Your wealth portfolio contains Narrower dfn: consider only securities Ex.stocks, bonds Wider dfn: house purchase, insurance, debt Broad dfn: human capital, education THE COURSE OF FINANCE 2017 SPRING SJTU 4
12.1Portfolio Selection Strategy There are general principles to guide you,but the implementation will depend on your personal circumstances >The life cycle Time horizon Risk attitude Role of professional asset managers THE COURSE OF FINANCE 2017 SPRING SJTU 5
12.1Portfolio Selection Strategy There are general principles to guide you, but the implementation will depend on your personal circumstances The life cycle Time horizon Risk attitude Role of professional asset managers THE COURSE OF FINANCE 2017 SPRING SJTU 5
The Life Cycle The risk exposure you should accept depends upon your age Your occupation Your initial wealth Your dependents D… THE COURSE OF FINANCE 2017 SPRING SJTU 6
The Life Cycle The risk exposure you should accept depends upon your age Your occupation Your initial wealth Your dependents … THE COURSE OF FINANCE 2017 SPRING SJTU 6
Implication for Investors (investing area) If you are older,the average remaining life of the investment is relatively short,and there is a larger probability that an investment in the risky security will result in a loss This is not serious if you have substantial assets,in which case you can afford to take the risk,and enjoy higher expected returns THE COURSE OF FINANCE 2017 SPRING SJTU
Implication for Investors (investing area) If you are older, the average remaining life of the investment is relatively short, and there is a larger probability that an investment in the risky security will result in a loss This is not serious if you have substantial assets, in which case you can afford to take the risk, and enjoy higher expected returns THE COURSE OF FINANCE 2017 SPRING SJTU 7
Implication for Investors (investing area) If you are younger,the average remaining life of retirement investment is longer,and there is only a small probability that an investment in the risky security will be less than the“safer”one Investing in the less risky security will almost always result in a significantly smaller retirement income THE COURSE OF FINANCE 2017 SPRING SJTU 8
Implication for Investors (investing area) If you are younger, the average remaining life of retirement investment is longer, and there is only a small probability that an investment in the risky security will be less than the “safer” one Investing in the less risky security will almost always result in a significantly smaller retirement income THE COURSE OF FINANCE 2017 SPRING SJTU 8
Implication for Investors (liquidity) Relatively early during a typical life cycle,there may be a need to liquidate some invested funds, perhaps for a house deposit,a child's education,or an uninsured medical emergency In the case where liquidating an investment early may damage long- term goals,some precautionary funds should be kept in lower-risk securities THE COURSE OF FINANCE 2017 SPRING SJTU 9
Implication for Investors (liquidity) Relatively early during a typical life cycle, there may be a need to liquidate some invested funds, perhaps for a house deposit, a child’s education, or an uninsured medical emergency In the case where liquidating an investment early may damage long- term goals, some precautionary funds should be kept in lower-risk securities THE COURSE OF FINANCE 2017 SPRING SJTU 9
Time Horizons Planning horizon The total length of time for which one plans Decision horizon The length of time between decisions to revise a portfolio Trading horizon The shortest possible time interval over which investors may revise their portfolios THE COURSE OF FINANCE 2017 SPRING SJTU 10
Time Horizons Planning horizon The total length of time for which one plans Decision horizon The length of time between decisions to revise a portfolio Trading horizon The shortest possible time interval over which investors may revise their portfolios THE COURSE OF FINANCE 2017 SPRING SJTU 10
