MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 4.3
Construction of the Optimal Portfolio
After determining the securities to be selected, the portfolio manager should find out how much should be invested in each security. The percentage of funds to be invested in each security can be estimated as follows:
Construction of the Optimal Portfolio
After determining the securities to be selected, the portfolio
manager should find out how much should be invested in each security. The
percentage of funds to be invested in each security can be estimated as
follows:
The first expression indicates the weights on each security and
they sum upto one. The second shows the relative investment in each security.
The residual variance or the unsystematic risk has a role in determining the
amount to be invested in each security.
Taking up the previous example
Thus, the proportions to be invested in different securities are
obtained. The largest investment should be made in security 1 and the smallest
in security 4.
