Portfolio Returns: Downside Risk or Upside Risk: The Art and Science of Investing in Stocks
17 Pages Posted: 3 Mar 2014
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: Suggested Citation