Portfolio theory is a term used to research the perfect type of investment. This is an investment that has a high return with low risk. However, the development of this theory looks at selection of stock in relation to the amount of benefits that are received. The investment in different stocks is diversification and reduces the amount of risk that is associated with a stock portfolio. Using this investment style will allow an investor to minimize losses.
Alternatives to selecting multiple stocks for a portfolio is to invest in an index fund. Investors will have many options for index funds such as an exchange traded fund. This is a type of fund that is used for an investor that is interested in investing in stocks, bonds and commodities. Exchange traded funds track a specific index such as the S & P 500. Investing in this type of index is a good option for anyone that will not have an option for currency conversion. Any investor in Asia, Hong Kong and Singapore can choose to invest in an exchange traded fund.
The use of this theory as it relates to index funds allows an investor to track stocks that may go up or down but will always pay off. Choosing an index fund allows an investor to pick a combination of a variety of financial products for their investment choice. Investing in a single stock carries two types of investment risk. These are systemic risk and unsystematic risk. Investors are not able to diversify any market product that carries systemic risk such as interest rates. However, increasing the quantity of a specific type of investment is unsystematic risk. This is the type of investment that is available using an index fund that includes a basket of financial products.
The perception of risk using this theory is affected by the perceived risk, return and management of a portfolio. However, this risk is dependent on the choices that are made when managing investment selections for an individual's portfolio. Choosing the type of risk that is associated with investment in a type of exchange traded fund will determine the type of return. Investing in these funds are available to investors trading on many types of exchanges such as the Singapore Exchange or using the Hong Kong Exchange.
Investors need to use elements of portfolio theory when choosing an exchange traded fund. This allows an investor to determine their level of risk and reward.