Anh Nguyen

Portfolio Theory

“is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets” (wikipedia)

Calculating holding -period returns

Before investing in shares, investors usually have a careful look at financial statements. In order to know  how much return will be for a single share invested, we have  formulas as follows:

If the investor hold shares for 1 year, Return will be:

R =  (D1 + P1 – P0) / P0

where :

R is percentage of return

D1 is dividend received

P0 is share price at the time bought

P1 is share price after 1 year  period bought

Ex: A share was bought for £2, dividend after one year is 10p, share is sold for £2.20.

R=(0.10+2.20-2)/2= 0.15 or 15%.