Calculations
Portfolio Return = (2%*23.6%) + (65.5%*1.7%) + (10%*23.3%) + (10.3%*2.5%) + (8%*33.1%) + (4.2%*-1.0%) = 6.77558000%
Portfolio Risk () = 14.2%
Based on the calculations, investing in a portfolio comprising of stocks from Disney, Citigroup, General Electric, Morgan Stanley, Home Depot and Ford would attract a return of 6.78% and risk of 14.2%. Evidently, the individual stocks comprise of highly risky assets (Morgan Stanley, and Citigroup) and the other assets are have relatively low risk. Evidently, investors would gain from such a portfolio although the risk is very high. The combination of assets in to a portfolio helps to diversify the risks associated with investing in individual assets (Mankiw, & Taylor, 2006). Even so, selecting portfolio weights is crucial to ensure that risk is minimized and the return maximized.
Changes in macroeconomic variables greatly affect investors causing them to be cautious about risk. Inflation and assets returns have an inverse relationship (Mankiw, & Taylor, 2006). This relationship implies that when the economy faces times of high inflation and commodity prices have increased investors cannot be able to save or invest reducing the purchase of assets, which cause their prices to fall in the market (Markowitz, & Blay, 2013). Therefore, the return on investment reduces affecting investors. When the prices of stocks are low, investors would tend to purchase large quantities with the expectation they would rise. In this case, the portfolio comprising of assets from Disney, Citigroup, General Electric, Morgan Stanley, Home Depot and Ford is worth investing in because the risk is minimized that when investing in induvial stocks. Citigroup has the highest share in portfolio and although the risk is high other assets with low risk in the portfolio help to balance the risk resulting to a portfolio with 14% risk.
In summary, High returns attract investors and without proper risk analysis, investors end up having portfolios with very high risk. During economic downturns, such investors are likely to incur huge losses because the assets have a high risk. As such, it is advisable to select a portfolio that has balanced risk to avoid losses that could arise from change in macroeconomic variables such as inflation and interest rates.
References
Connor, G., Goldberg, L., & Korajczyk, R. (2010). Portfolio Risk Analysis. New Jersey: Princeton University Press
Mankiw, G., & Taylor, M. (2006). Economics. Boston, MA: Cengage Learning.
Markowitz, H., & Blay, K. (2013). Risk return analysis: The theory and practice of rational investing (volume one). New York: McGraw Hill Professional
