BUS 660 Grand Canyon University Risk Management Discussion
Think about your own retirement investment portfolio or find an example of one online. Discuss how you might use a model to create the optimum portfolio allocation for your risk level
Elizabeth Quiroz
Nov 13, 2023, 1:56 PM
It is important when thinking of creating an investment portfolio for our retirement that the risk and returns are balanced. Various models can guide investors and investment portfolios are utilized by financial officers when building portfolios based on clients’ needs. Informed decisions are most effective when such models are utilized in the process of portfolio construction, increasing the potential for the achievement of long-term financial objectives.
With this, Harry Markowitz developed the Modern Portfolio Theory in 1952. MPT suggests that investors’ portfolios can be optimized by considering the correlation between assets and by aiming to maximize expected returns for a given level of risk.
We can determine the optimum allocation by utilizing various quantitative models and/or software tools that are available. One of the common examples used would be the Capital Asset Pricing Model also known as the CAPM. According to the CFI team (2022), CAPM is a model that considers the expected return of an asset concerning its risks and the overall market’s risk. It is suggested that the ideal allocation that balances risk and potential rate of return is also based on the individual’s risk tolerance. This is made to the personalization of the individual’s risk level. CAPM aids investors in the assurance that their investments are investors in ensuring that their investments are aligned with the individuals’ comfort level in the degree of risk they are comfortable with as they aim for the maximization of the potential degree of return in the long term.
As I ponder the thought of my retirement investment portfolio, I believe that the MPT would be the principles I would apply as well as integrate the concepts of CAPM to optimize the allocation of my portfolio based on the risk and return considerations. Using this model would help me analyze the different assets such as stocks, bonds, and real estate considering historical data and being able to evaluate how they perform under different market circumstances.
One of the suggestions CAPM has is that stocks tend to offer a higher return but they are known to have more risk. also associated with a higher risk. As for bonds, they tend to be more constant with a lower rate of return.
As I am highly tolerant of risk the model might recommend investing in stocks. My score after taking the risk test was 26, which means:
16 to 35 points
You’re not afraid to risk a little, but you don’t take risks unnecessarily. You’ll risk a bit if there’s a good potential payoff, but you don’t want to put all of your savings on the line. That’s a prudent strategy, though it won’t double your savings overnight. You’ll probably want a well-diversified portfolio that’s balanced between cash, bonds and stocks.
References:
Capital Asset Pricing Model (CAPM).(2022, November 24). Corporate Finance Institute. Retrieved from https://corporatefinanceinstitute.com/resources/valuation/what-is-capm- formula/
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