Page 77 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 2. Security and Portfolio Value-Relative

Security Current Proportion Current Expected Expected Contribution to
Value of current Price End-of- Holding- Portfolio
value of Per Period Period Expected
Properties Share Value Per Value- Holding-Period
Share Relative Value-Relative
(1) (2) 3 = (2) (4) (5) (6) (7) = (3) × (6)
( ) 20,000 ( ) ( ) = (5)/(4)
XUZ 1,500 .0750 15,00 18.00 . 1,200 0.090000
ABC 3,000 .1500 20,00 22.00 1,100 0.165000
RST 8,000 .4000 40,00 45.00 1,125 0.450000
KNF 6,250 .3125 25,00 30.00 1,200 0.375000
DET 1,250 .0625 12,50 15.00 1,200 0.075000
20,000 1.0000 1.155000

3. Security and Portfolio Holding-period Returns

Security Proportion of Expected Holding Contribution to
Current Value Period Return Portfolio Expected
of Portfolio (%) Holding Period Return (%)

1 2 3 4
XYZ .0750 20.00 1.50
ABC .1500 10.00 1.50
RST .4000 12.50 5.00
KNF .3125 20.00 6.25

DET .0625 20.00 1.25
1.0000 15.50

Since the portfolio's expected return is a weighted average of the expected returns of its
securities, the contribution of each security to the portfolio's expected returns depends on
its expected returns and its proportionate share of the initial portfolio's market value.
Nothing else is relevant. It follows that an investor who simply wants the greatest possible
expected return should hold one security. This should be the one that is considered to have
the greatest expected return. Very few investors do this, and very few investment advisers
would counsel such an extreme policy. Instead, investors should diversify, meaning that
their portfolio should include more than one security. This is because diversification can
reduce risk.

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