CONSTRUCTION OF PORTFOLIO:
Portfolio construction means determining the actual composition of portfolio. It is critical stage because asset mix is the single most determinant of portfolio performance. Portfolio construction requires knowledge of the different aspects of securities. The components of portfolio construction are:
- Asset allocation meaning setting the asset mix.
- Security selection involving choosing the appropriate security to meet the portfolio targets.
- Portfolio structure involving setting the amount of each security to be included in the portfolio.
- Investing in the securities presupposes risk. A common way of reducing risk is to follow the principle of diversification. Diversification is investing in a number of different securities rather than concentrating in one or two securities. The diversification assures benefit of obtaining the anticipated return on the portfolio of securities. In a diversified portfolio, some securities may not perform as expected but other May exceed expectations with the effect that the actual results of the portfolio will be reasonably close to the anticipated results.
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