What are the things you have to check when choosing stocks to invest on (portfolio) in...

What are the things you have to check when choosing stocks to invest on (portfolio) in terms of Return, Risk, Correlation and Beta. And Why?

Expert Solution

You have to check Return, Risk in terms of standard deviation and Correlation when choosing stocks to invest on (portfolio)

Let’s assume there is a portfolio of two securities:

Sl. No.	Parameter	Security 1	Security 2
1.	Investment proportion	w1	w2
2.	Expected Return	E(R1)	E(R2)
3.	Standard Deviation	σ1	σ2

The individual risks of the securities and nature & correlation amongst the risks of individual securities will determine the portfolio risk. In order to understand portfolio risk we need to under how two securities will move with respect to each other. This movement is captured by two statistical terms “Covariance” and “Correlation”.

Hence, we can see that all the following variables need to be checked as they appear at one place or other in the two equations abve.:

Return,

Risk,

Correlation

However, beta doesn't find any metnion in the formula. Hence, for the purpose of portfolio investment, one need not worry about.

jeff jeffy answered 1 year ago

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