What is the market portfolio?

The market portfolio is the market value-weighted portfolio of all risky assets in an economy. In this post, we show how the market portfolio is equivalent to the optimal risky portfolio when all investors behave according to the modern portfolio theory. Learning objectives Understand the link between the optimal risky portfolio and the market portfolio. […]

What is the optimal risky portfolio?

In the previous post, we explained that when there is no risk-free asset in an economy, investors should invest in one of the efficient portfolios that lie on the efficient frontier based on their risk tolerance. We added that, if a risk-free asset exists, then there is a unique efficient portfolio that all investors should […]

Efficient frontier – What is it?

The efficient frontier is the collection of all efficient portfolios in a market. But, what does that actually mean? How can investors distinguish between efficient portfolios and inefficient ones? Learning objectives Understand the concept of an efficient portfolio. Identify the main features of the efficient frontier. The mean-variance framework Not all portfolios of assets are […]

Order book – trading stocks and other securities

We know that a key feature of markets is that they bring buyers and sellers together. Markets facilitate trades between these two parties. One method markets can use to match buyers and sellers is through an order book. And, this is the topic of this post. Learning objectives Define what an order book is within […]

The risk of a portfolio – Calculator and formula

We often say that risk and return are two sides of the same coin. You can’t discuss one without the other. In the previous post, we showed you how to calculate the return on a portfolio of assets. In this post, we explain the formula for portfolio risk. We also offer an easy-to-use portfolio risk […]

Portfolio return – Calculator and formula

So far in this course on investments, we have focused on investing in a single asset. However, in reality, many investors invest in more than one asset and hold portfolios of assets. Furthermore, there is a massive investment management industry out there, including mutual funds, exchange-traded funds, hedge funds, insurance funds, pension funds, sovereign wealth […]

Risk premium – What does it mean?

Different stocks offer different levels of expected return. What causes stock A’s expected return to be higher than stock B’s expected return? How does the expected return of a risky asset relate to the risk-free rate of return? In this post, we answer both questions by introducing the concept of risk premium. Learning objectives Define […]

Risk-free rate of return – Is there a riskless asset?

Most assets in our world are risky: Their future payoffs can take many different values, some of them (very) high, others (very) low. Think about stocks. If you invest in, say, Amazon shares today, you might have a target price in mind for the next year. However, the actual price in a year may be […]

The risk appetite of investors

How do investors differ in terms of their risk preferences? Are we all risk lovers? Or, do we prefer to avoid or minimize risk if we can? Perhaps our risk appetite is more dynamic. For instance, it may depend on the situation and our circumstances. In this post, we will elaborate on how financial economists […]