Research on the Process of the Formation of an Optimal Investment Portfolio

Research Article
Open access

Research on the Process of the Formation of an Optimal Investment Portfolio

Yunhe Zhang 1*
  • 1 University College London    
  • *corresponding author zcakyz8@ucl.ac.uk
Published on 13 September 2023 | https://doi.org/10.54254/2754-1169/8/20230338
AEMPS Vol.8
ISSN (Print): 2754-1177
ISSN (Online): 2754-1169
ISBN (Print): 978-1-915371-43-0
ISBN (Online): 978-1-915371-44-7

Abstract

In the financial market, there are different types of financial instruments, such as equities, bonds, and mutual funds, and investors can build an investment portfolio through their buying and selling activity in the market. Limited-experienced individual investors are often attracted to stocks or bonds with high returns when trading in the financial market and building an investment portfolio. This could make them underestimate the adverse impact brought by investment risks on their expected returns for the portfolio. An optimal investment portfolio should be aimed at with a step-by-step process that considers risk tolerance, portfolio selection, and the monitoring of the portfolio after it has been formed. This theoretical process would first consider the way in which individual investors could assess the risk involved in the portfolio. The beta coefficient is one of the indicators and it can be estimated via the capital asset pricing model (CAPM). Then, a well-diversified portfolio would be favoured, not only across different financial instruments, but also across different industries, and the minimum desired number of instruments included in the portfolio is 30. Rebalancing portfolios is a crucial step in keeping the original structure, and Žilinskij’s criterion helps individual investors to rebalance more efficiently. Although this process helps investors in building investment portfolios, it should include more areas of concern about investors’ own interests and the plausibility should be further tested.

Keywords:

investment, investment portfolio, risk, portfolio selection, investment strategy

Zhang,Y. (2023). Research on the Process of the Formation of an Optimal Investment Portfolio. Advances in Economics, Management and Political Sciences,8,333-339.
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References

[1]. Thakur, M. (2022, June 18). Investment Examples. WallStreetMojo. https://www.wallstreetmojo.com/investment-examples/

[2]. Hall, J. (2022, July 8). Differences Between Common Stock vs. Preferred Stock. The Motley Fool. https://www.fool.com/investing/stock-market/types-of-stocks/common-stock-vs-preferred-stock/

[3]. Benson, A., & Jackson, A. (2022, August 17). Investment Portfolio: What It Is and How to Build a Good One. NerdWallet. https://www.nerdwallet.com/article/investing/investment-portfolio

[4]. Dubinskas, P., & Urbšienė, L. (2017). Investment Portfolio Optimization by Applying a Genetic Algorithm-based Approach. Ekonomika, 96(2), 66–78. https://doi.org/10.15388/ekon.2017.2.10998

[5]. Rajendran, M. (2015). Asset Allocation of Portfolio Management. Journal of Research in Business, Economics and Management, 2(1), 40-45. Retrieved from http://www.scitecresearch.com/journals/index.php/jrbem/article/view/60

[6]. Corporate Finance Institute. (2022, January 21). Beta Coefficient. https://corporatefinanceinstitute.com/resources/knowledge/finance/beta-coefficient/

[7]. Sukrianingrum, D. R., & Manda, G. S. (2020). THE EFFECT OF SYSTEMATIC RISK AND UNSYSTEMATIC RISK ON EXPECTED RETURN OF OPTIMAL PORTFOLIO. SAR (Soedirman Accounting Review) : Journal of Accounting and Business, 5(2), 181. https://doi.org/10.20884/1.sar.2020.5.2.3772

[8]. Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.2307/2975974

[9]. Statman, M. (1987). How Many Stocks Make a Diversified Portfolio? The Journal of Financial and Quantitative Analysis, 22(3), 353. https://doi.org/10.2307/2330969

[10]. Žilinskij, G. (2015). INVESTMENT PORTFOLIO REBALANCING DECISION MAKING. European Scientific Journal, ESJ, 11(6). Retrieved from https://eujournal.org/index.php/esj/article/view/5209

[11]. Prayudha, D. R., & Kuswanto, G. (2019). Factors that Influence Investors in Investing Stock with Investment Interest as Mediating Variable in Indonesian Capital Market. International Journal of Advance Study and Research Work, 2(4). https://doi.org/10.5281/zenodo.2649091

Cite this article

Zhang,Y. (2023). Research on the Process of the Formation of an Optimal Investment Portfolio. Advances in Economics, Management and Political Sciences,8,333-339.

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About volume

Volume title: Proceedings of the 2nd International Conference on Business and Policy Studies

ISBN：978-1-915371-43-0(Print) / 978-1-915371-44-7(Online)
Editor：Javier Cifuentes-Faura, Canh Thien Dang
Conference website: https://2023.confbps.org/
Conference date: 26 February 2023
Series: Advances in Economics, Management and Political Sciences
Volume number: Vol.8
ISSN：2754-1169(Print) / 2754-1177(Online)

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References

[1]. Thakur, M. (2022, June 18). Investment Examples. WallStreetMojo. https://www.wallstreetmojo.com/investment-examples/

[2]. Hall, J. (2022, July 8). Differences Between Common Stock vs. Preferred Stock. The Motley Fool. https://www.fool.com/investing/stock-market/types-of-stocks/common-stock-vs-preferred-stock/

[3]. Benson, A., & Jackson, A. (2022, August 17). Investment Portfolio: What It Is and How to Build a Good One. NerdWallet. https://www.nerdwallet.com/article/investing/investment-portfolio

[4]. Dubinskas, P., & Urbšienė, L. (2017). Investment Portfolio Optimization by Applying a Genetic Algorithm-based Approach. Ekonomika, 96(2), 66–78. https://doi.org/10.15388/ekon.2017.2.10998

[5]. Rajendran, M. (2015). Asset Allocation of Portfolio Management. Journal of Research in Business, Economics and Management, 2(1), 40-45. Retrieved from http://www.scitecresearch.com/journals/index.php/jrbem/article/view/60

[6]. Corporate Finance Institute. (2022, January 21). Beta Coefficient. https://corporatefinanceinstitute.com/resources/knowledge/finance/beta-coefficient/

[7]. Sukrianingrum, D. R., & Manda, G. S. (2020). THE EFFECT OF SYSTEMATIC RISK AND UNSYSTEMATIC RISK ON EXPECTED RETURN OF OPTIMAL PORTFOLIO. SAR (Soedirman Accounting Review) : Journal of Accounting and Business, 5(2), 181. https://doi.org/10.20884/1.sar.2020.5.2.3772

[8]. Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91. https://doi.org/10.2307/2975974

[9]. Statman, M. (1987). How Many Stocks Make a Diversified Portfolio? The Journal of Financial and Quantitative Analysis, 22(3), 353. https://doi.org/10.2307/2330969

[10]. Žilinskij, G. (2015). INVESTMENT PORTFOLIO REBALANCING DECISION MAKING. European Scientific Journal, ESJ, 11(6). Retrieved from https://eujournal.org/index.php/esj/article/view/5209

[11]. Prayudha, D. R., & Kuswanto, G. (2019). Factors that Influence Investors in Investing Stock with Investment Interest as Mediating Variable in Indonesian Capital Market. International Journal of Advance Study and Research Work, 2(4). https://doi.org/10.5281/zenodo.2649091

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