Page 85 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes 8. The risk/return trade-off tells us that the higher risk gives us the possibility of higher
returns.

4.5 Portfolio and Security Returns

A portfolio is a collection of securities. As it is rarely desirable to invest the total funds of an
individual or an institution in a single security, it is necessary that every security be looked at in
a portfolio context. Therefore, it seems reasonable that the expected return of a portfolio should
depend on the expected return of each of the security contained in the portfolio. It also seems
logical that the amounts invested in each security should be important. Indeed, this is the case.
The example of a portfolio with three securities shown in tables 4.1 to 4.3 illustrates this point.
The expected holding period value – relative for the portfolio is clearly shown:

` 23,100
= 1.155
` 20,000
Giving an expected holding period return of 15.50%.

Table 4.1: Security and Portfolio Values

Security No. of Current Price Current Expected End-of- Expected End-of-
Shares Per Share Value Period Share Value Period Share Value
(`) (`) (`) (`) (`)
1 2 3 4 5 6
XYZ 100 15.00 1,500 18.00 1,800
ABC 150 20.00 3,000 22.00 3,300
RST 200 40.00 8,000 45.00 9,000
KNF 250 25.00 6,250 30.00 7,500
DET 100 12.50 1,250 15.00 1,500
20.000 23.100

Table 4.2: Security and Portfolio Value-Relative
Security Current Proportion of Current Expected Expected Contribution to
Value Current Price End-of- Holding- Portfolio
Value of Per Share Period Period Expected
Properties Value Per Value- Holding-Period
Share Relative Value-Relative
(1) (2) (3) = (2)/20000 (4) (5) (6) = (5) / (4) (7) = (3) × (6)
(`) (`) (`)
XYZ 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

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