Question

what is Portfolio? How does a stock or asset within a portfolio impact the overall Risk and Return of the Portfolio? Provide a simple example

Answer 1

A portfolio comprises of investments in different forms of financial assets/instruments such as stocks, mutual funds, deposits with bank and bonds. A portfolio can also include investments in financial instruments having different maturity periods. The basic objective of establishing a portfolio is to generate maximum returns with minimum risks. The construction of a portfolio also depends on the risk appetite of the investor.

For Instance, a conservative investor may decide to invest a substantial amount of his/her money in fixed income instruments (such as bonds) or fixed deposits. Investments in these instruments can help in reducing the risk associated with equity market investments. An aggressive investor, on the other hand, may prefer to invest more money in equity/stocks and less money in fixed investment instruments. Investment in equity market carry substantial risks and can provide substantial returns to the investor. However, such returns are not guaranteed and the investor can lose his/her entire wealth if the stock market doesn't perform as per the expectations. Therefore, investors may choose to invest some part of their money in mutual funds which are professionally managed by experts in the relevant field. A balanced investor may decide to include both stocks/equity, mutual fund and debt instruments in his/her portfolio to minimize the risk and still earn a reasonable return on total investment.