Question

Given the factors that impact the expected return and risk how would you create a portfolio today? How will this change if I ask you to do this same assignment in 20 years? What would you include in it and why?

Answer 1

To create a portfolio today, balance between expected return and risk must be achieved, with diversity across assets being key. In 20 years, portfolio adjustments would reflect changes in technology, economy, and individual circumstances, with a shift from high risk/high return to capital preservation as one nears retirement.

Step-by-step explanation:

Creating a portfolio involves a careful balance between expected return and risk. To construct a portfolio today, you would find the expected value for each investment, determine the safest and riskiest investments based on their volatility and past performance, and identify which investment offers the highest expected return on average. A diversified saving and investing portfolio is crucial, as it spreads out risk across various asset classes and industry sectors, which could include stocks, bonds, real estate, and potentially cryptocurrencies or other alternative investments.

In 20 years, the composition of a portfolio could change significantly due to factors like technological advancements, changes in the global economy, and one's personal circumstances. It is important to reassess your portfolio regularly to ensure it aligns with your changing risk tolerance and life stages. During the early part of your career, for instance, you might be able to take on more risk for a potentially higher return, as you have more time to recover from potential losses. As you approach retirement, the focus generally shifts towards preserving capital and ensuring a steady income.

• To purchase stocks, one can go to stock exchanges through brokers or online trading platforms.
• Considering diversification is imperative to mitigate the risk of significant losses from any single investment or sector.

Ultimately, investment decisions are quite personal and should reflect an individual's financial goals, risk tolerance, and time horizons. Adjusting your portfolio over time to respond to life changes and economic shifts is essential to maintaining the delicate balance between return and risk.