Investment Education: Understanding Portfolio Optimization

Abstract

Investing in a stock market is very challenging. Investors need to understand the nature of stock-price movement and various factors that influence this fluctuation. Being unable to read the market’s movements will expose investors to uncertainty in investment returns and can lead to capital loss. Investors need to manage investment risks well. When managing an investment, risk can be managed by investing in a portfolio of assets rather than in a single asset. However, how does a portfolio of assets work in reducing investment risk? This can be explained by a complex mathematical approach. Therefore, this study aimed to provide an exposition to investors and students about managing a portfolio’s risk and the importance of asset allocation. A case study of two risky-asset portfolios has been used in the construction of efficient portfolios using a mean–variance model. As a result, students and investors can see the risk–return relationship in a portfolio’s efficient management and the importance of risk-free assets in the generation of a portfolio’s rate of return.

Keywords

• investment
• portfolio
• diversification
• optimization