Page 95 - BFSI CHRONICLE 10 th Issue (2nd Annual Issue ) .indd

Edition July 2022
Annual Issue, 10
BFSI Chronicle, 2 Annual Issue, 10 Edition July 2022
BFSI Chronicle, 2
nd
nd
th th
THE ART nvestment decision has traditionally
been centred around choosing the “best”
fund or stocks (or an “asset class” for that
AND A Imatter). In their quest to “maximising”
returns, investors, more often than not, stay
oblivious of the risk that this strategy entails -
SCIENCE the Concentration Risk.
Investors use the concept of net present value
(NPV) to distinguish high quality stocks, where
OF ASSET in stocks are valued by discounting their future
cash flows. Stocks that are capable of generating
more money at a quicker rate are given greater
ALLOCATION preference.

NPV theory has shortcomings as selecting the
“best” portfolio under this logic means selecting
a single stock with the highest expected NPV.
Loading up of a single stock or similar kind
of asset classes (say, stocks from same sector/
industry) is fraught with immense risk.
Discernibly, if the market adversely impacts the
chosen set of stocks or asset class, the portfolio
value comes crashing down, and the objective
of maximising returns falls flat.
Origin of Modern Portfolio Theory (MPT)
How to liberate investors from this conundrum,
and achieve an optimal return even while
keeping the risk (volatility) mitigated? The way
was shown in the year 1952 by noted economist
and Nobel Laureate, Harry Markowitz through
his epic work that forms the core of modern
day investment management process. He
demonstrated that volatility of a portfolio that
is created by blending of different assets is less
than the volatility of the sum of its part.
To understand the math behind blended
returns, let's start with a simple case of two
investment choices and two years.
Shri Dibyendu Mukherjee, Investment “A” goes up 30% the first year, and
M.Com, MBA (Finance) 0% the second year.
Personal Finance Professional

The Institute Of Cost Accountants Of India
The Institute Of Cost Accountants Of India
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