Prospective investors need to know the basics of investment decisions in shaping their portfolio. This knowledge has the intention that prospective investors understand the relevance of investment to the level of risk and Expected return. By understanding the basics of investment decisions in a portfolio, prospective investors will also understand their ability to bear the risk.
Previously, prospective investors needed to understand the meaning of the portfolio. This is so that you are more easily stepping into various terms related to the portfolio.
The portfolio is a collection of assets or securities. In other words, the portfolio is a collection of investments from various kinds of assets such as stocks, options, gold, bonds, futures contracts, real estate, and other assets. Generally, portfolios have different levels of profit, risk, and time period.
Actually, portfolio theory has long been found, namely in 1952. In short, investors always try to get the expected high level of income on their investment. And investors also try to avoid the risks of their investments. So generally, investors will look for high yield levels by avoiding risks. Therefore investors will buy more than one type of investment instruments related to risk. Portfolio theory is a theory that discusses the relationship between the level of profit and the level of investment risk in more than one type of investment.
Prospective investors should invest by forming a portfolio. Forming a portfolio tends to be more profitable than investing all capital in only one type of investment. The portfolio has a function of diversifying assets. Therefore, if you form a portfolio it will reduce the risk.
Basics of Investment decisions in Portfolios.
In the basics of investment decisions, we will discuss the level of expected returns, the level of risk, and the relationship between the two.
Expected Return Level.
Prospective investors need to know the Expected Return and Realized Return. The expected return is the level of return anticipated by investors in the future. Whereas realized return or actual return is the level of return that has been obtained from investment in the past. Investors might get the difference between the Expected return and the actual return rate of the investment made. Investors must consider the risk of the difference between expected return and actual return.
Another important thing in learning the basics of investment decisions is understanding the level of risk for investors. Investors do expect high returns in their investments. But investors must also always consider the level of risk that must be borne by the investment. The natural thing in investment is the greater the risk, the greater the expected rate of return.
Investors face three types of attitudes towards the risk of their investment. Risk Averse, Investors need an increase in compensation for the increased risk given.Risk Indifferent, Investors do not require changes in compensation for the increased risk. And last Risk Seeking, the Investor receives a decrease in compensation for the increased risk given.
Relationship between Risk Level and Level of Expected Return.
Investors must know that there is a relationship between the expected return and the level of risk. By knowing this relationship, investors will manage their ability to accept the risk and the level of expected return on their investment. The level of risk and the expected return has a direct relationship. This means that the greater the risk of an asset, the greater the level of expected return on the asset.