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Research on the Process of the Formation of an Optimal Investment Portfolio
- 1 University College London
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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
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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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