Portfolio Analysis: Risk and Return in Financial Markets



One of the most important variables that investors have to confront when investing in financial assets is risk, and the proper definition, measurement and management of risk is essential to the study of financial markets. Investors in financial assets do not usually put all their eggs into one basket; that is, they are not usually content to place all their financial wealth into only one financial asset. Typically an investor will hold a bundle of financial assets known as their asset portfolio. Generally speaking investors are concerned about two key variables, namely the risk and return on their asset portfolio. As we shall see, most investors will seek to hold what are known as efficient portfolios, that is one that will maximize the expected return for any given level of risk, or equivalently minimize the risks for a specified expected return.


Financial Market Risky Asset Financial Asset Efficiency Frontier Market Risk 
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Further reading

  1. Elton, E., Gruber, M., Brown, S. and Goetzmann, W.N. (2002) Modern Portfolio Theory and Investment Analysis Wiley.Google Scholar
  2. Reilley, F.K. and Brown, K.C. (2002) Investment Analysis and Portfolio Management South Western College Publishing.Google Scholar
  3. Sharpe, W.F., Alexander, G.J. and Baley, J. (2002) Investments 6th edn, Pearson.Google Scholar

Chapter 7: Portfolio Analysis: Risk and Return in Financial Markets

  1. Markowitz, H. (1959) Portfolio Selection: Efficient Diversification of Investments. New York: John Wiley.Google Scholar
  2. Solnik, B.H. (1974) ‘Why Not Diversify Internationally Rather Than Domestically?’, Financial Analysts Journal, July—August, pp. 48–54.Google Scholar
  3. Tobin, J. (1958) ‘Liquidity Preference as Behaviour Towards Risk’, Review of Economic Studies, vol. 56, pp. 65–86.CrossRefGoogle Scholar
  4. Wagner, W. and Lau, S. (1971) ‘The Effect of Diversification on Risk’, Financial Analysts Journal, July—August, pp. 48–53.Google Scholar

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© Keith Pilbeam 2005

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