Portfolio Returns: Downside Risk or Upside Risk: The Art and Science of Investing in Stocks

17 Pages Posted: 3 Mar 2014

See all articles by Ojwang Omondi

Ojwang Omondi

University of Nairobi - Department of Accounting and Finance

Date Written: March 2, 2014

Abstract

Investment in the financial markets is guided by the trade-off between expected returns and risk appetite of the investor. Higher risks could possibly result in higher expected return on the upside risk but the possibility of massive downside risk of loss must never escape the investor. The dynamic market condition should shape an investor's macro-economic perception with a view to taming the market but not to beat the market for the latter is a herculean and elusive task to undertake. Portfolio theory draws from the theory of the firm only that the former deals with investors both rational and irrational with a view to optimal asset mix in a diversified portfolio subject to future uncertainty. Models have been developed to analyze economic equilibrium in the face of optimizing investors including CAPM and APT an analysis of which forms the basis of this paper with a brief look on portfolio performance.

Keywords: CAPM, APT, Risk, Returns

JEL Classification: G11, G12

Suggested Citation

Omondi, Ojwang, Portfolio Returns: Downside Risk or Upside Risk: The Art and Science of Investing in Stocks (March 2, 2014). Available at SSRN: https://ssrn.com/abstract=2403507 or http://dx.doi.org/10.2139/ssrn.2403507

Ojwang Omondi (Contact Author)

University of Nairobi - Department of Accounting and Finance ( email )

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