Investors choose to hold groups of securities rather than single security that offers the greater expected returns. They believe that a combination of securities held together will give a beneficial result if they are grouped in a manner to secure higher return after taking into consideration the risk element. Traditional portfolio analysis has been of a very subjective nature but it has proved success to some investors who have made their investments by making analysis of individual securities through evaluation of return and risk conditions. The investor has been able to get the maximum return at the minimum risk. The normal method of calculating the return on individual security is to find out the amount of dividends, price earning ratios, common holding period and an estimate of the market value of the securities. The modern portfolio theory believes in the maximisation of return through a combination of securities. It deals with the relationship between different securities and inter – relationships of risks between them. An investor can achieve a success by making a choice of investment outlets and combining a security of low risk with another security of high risk.
What is the role of investors in modern portfolio theory?
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