Station 5: Understanding Portfolio Construction (UI)

Description

Understanding Portfolio Construction is the stage on which all the actors introduced in Modules 1-4 can interact and perform. Risk and return take on new personas and asset classes begin to behave differently than when they were in isolation: normally rambunctious stocks can exert a moderating influence on the crowd, while introverted bonds can emerge as the catalyst for many a convivial conversation.

Asset classes are social animals, and their personality transforms in a portfolio setting. Our preferences as to which of these characters we wish to mingle with, in what combination, and for how long add yet another dimension to the complexity.

Modern Portfolio Theory (MPT) describes these transformations, interactions and permutations in the context of an investment portfolio. One peculiarity is that adding a risky asset to a portfolio can actually reduce overall risk, which many find counter-intuitive. Another key insight is that a portfolio of two or more risky assets can be engineered to maximise return for a given level of risk, or minimise risk for a given level of return. Only a finite set of such portfolios exists, and collectively they trace out a curve known as the Efficient Frontier.

System Requirements

See System Requirements in the Coggno Knowledge Base