Choosing an investment portfolio

There are many different strategies that one could employ when deciding which stocks to buy. One strategy, for example, might be based on the risk free rate of return - but this article will try instead create a simple method by using key fundamental data in order determine what investments would produce highest returns while also keeping certain risks factored into consideration (such as volatility).

Modern Portfolio Theory

Modern portfolio theory (MPT) is a framework for constructing investment portfolios that seek to maximize return while minimizing risk. MPT suggests that an optimal portfolio is one that is diversified across a range of asset classes, with each class represented in proportion to its share of the overall market capitalization. In order to achieve this level of diversification, MPT suggests that a minimum of 15 shares should be held in the portfolio. While this may seem like a lot, research has shown that portfolios with 15 or more shares are less risky than those with fewer shares. As such, MPT provides investors with a valuable tool for constructing portfolios that seek to balance risk and return.

Beta

Beta is a measure of how much a stock moves in relation to the market. A Beta greater than 1 means the stock beats the market, while a Beta less than 1 means it loses to the market. Beta can be used to find a combination of shares that move with the market or those that are congruent to market movements. For example, if you want to find stocks that will go up when the market goes up, you would look for stocks with a Beta greater than 1. If you want to find stocks that will go down when the market goes down, you would look for stocks with a Beta less than 1. Beta can also be used to find stocks that are not affected by the market. These are called non-correlated stocks. Non-correlated stocks have a Beta of 0. For example, if you want to find a stock that will go up when the market goes down, you would look for a stock with a Beta of -1. Beta is an important tool for finding investment opportunities. By using Beta, you can find stocks that fit your investment strategy and minimize your risk.

Different Industries

If we look at a list of the top valued companies within say, ASX then it is easy to create our own shortlist. Choosing different stocks from various industries can lower market risk but overall systematic risks still remain present in this type investment project as well if everything fails there will always be risks which need consideration when doing so professionally and responsibly!

Using data to choose a selection

You can use historical data to predict the potential growth of shares. Using a charting tool on free online websites like Yahoo finance or Google finance allows you work out how much each share has grown over time and see if they beat an index in doing so.

Tangency Portfolio Example using R Code

The following R Code (Download: https://www.rstudio.com/products/rstudio/download/)code displays best fit of portfolio allocation based on several asset classes.

The efficient frontier is a concept in modern portfolio theory that demonstrates the trade-off between risk and return. In essence, it shows that there is a relationship between these two factors, and that investors must choose an appropriate balance between them. For example, a higher return typically comes with more risk, while a lower return usually means less risk. The efficient frontier can help investors to identify the optimal balance between risk and return for their individual needs.

One way to construct an efficient frontier is by using a variation of assets invested in using the self-invest option on Q Super https://qsuper.qld.gov.au/investments/options/self-invest. This approach uses data from the Australian Securities Exchange (ASX) and R statistical analysis to create an efficient tangency frontier. By looking at five years' worth of data, this approach can provide a clear picture of the optimal balance between risk and return. This helps investors to make informed decisions about how to allocate their assets.

Using the code below you can easily create your own allocations by changing the Tickers to suit your share investments. http://rpubs.com/simonaa2/tangencyportfoliohtml