Portfolio Theory Essay Example | Topics and Well Written Essays - 1750 words

Portfolio Theory - Essay Example While it has already been established that Portfolio 2 gives the higher expected return rate, the risk involved would also have to be considered. Portfolio 3 has the higher standard deviation. This means that the projects that make up Portfolio 3 are riskier by nature, or that they involve more uncertainties as compared to those in Portfolio 2. This, however, is not to be counted as a disadvantage for Portfolio 3 since it has turned out that the investors are known to be high risk-takers. They do not mind taking in more risk in exchange for higher return. Based on these given facts, Portfolio 3 is the better choice to recommend to the Top Choice Investments group. As for the combination of the two projects making up Portfolio 2, it has a positive covariance figure. Computed at 97.50%, this means that the two projects generally tend to move in the same direction in terms of positive and negative developments. The factors that are favorable for one project in Portfolio 2 are equally beneficial for the other project. Accordingly, the factors that are detrimental to one project have high chances of also negatively affecting the other project in Portfolio 2. As a portfolio, this does not present a good combination, since bad indications for one would mean similarly bad things for the other. With a correlation coefficient computed at 0.65, Portfolio 2 would be expected to increase in value during the good days of both projects and to decrease in value during the bad days. With such positive correlation coefficient, Portfolio 2 would suffer badly during days when either project in it would be adversely affected by prevailing situations. Such a scenario occurs when two projects in a portfolio involve the same industry, like the real estate industry. Therefore, if a portfolio is composed of a project in a building and another in an apartment, it would mean big damages