Investing

Building an Efficient Portfolio

Currently, an investor or investment manager handling an “efficient portfolio” should already be completely globalized, they should be what is known as a “citizen of the world”, and feel equally at ease investing in assets in any of the markets available.

Create Investment Portfolio of Art, Gems, Jewels, Collectibles

Other assets such as art, gems, jewels, collectible articles, are also, as we have seen, part of an investment portfolio, but require sophisticated and knowledgeable investors, besides having many more restrictions, are expensive to support and need different care than any other type of asset. Generally, legacies passed from generation to generation, and many times managed by trustees or specialized executors.

Building an International Portfolio for Diversification

Finally, when building an international portfolio you should include an adequate currency diversification. In this case, the investor also assumes the area or country risk (o the rest of the countries where investors are performed), the devaluation possibility in the rest of the currencies before the American dollar, which is the currency used as the worldwide benchmark; however, there could also be the case of the US dollar devaluation before other currencies, situation which would be positive for the portfolio (when dollarizing every investment).

Real Estate Investment VS Inflation

As for real estate prices, these move at a negative correlation with inflation, for which they have historically served as a refuge against the latter (curiously this trend did not happen in the US or in Europe during the golden years in the nineties, where the real estate market continued to rise with low inflation rates)

Ways of Choosing and Investing Stocks

Along these sections we have studied ways of choosing, measuring and investing mainly in stocks (assets in vogue), and bonds to a lesser extent; however, we have also mentioned the need of diversifying our investments in other kinds of assets, whose properties require other types of studies and variables.

PORTFOLIO DIVERSIFICATION

I always liked art and my favorites are the late XIX century impressionist painters. When I studied economy in Boston, I remember going to the Arts Museum and spending hours in front of the Renoir painting, dreaming that I would someday be able to buy one for my home. Renoir paintings are sold for millions of dollars and I have none so far, but I have met investors that keep a large part of their fortunes in famous paintings.

Calculate Stock Portfolio Profitability

From this calculation we can expect that the “i” asset profitability should be 11.5%, considering that the rest of the premises remain unchanged. Here is how to calculate a stock portfolio profitability:

Similarly, we see that when “i” has a 1.5 beta, it risk premium is increased over the market risk premium in that same proportion (the larger the beta coefficient, the larger the asset’s risk premium and, therefore, the larger the expected yield will be; the lower the beta coefficient, the lower the required profitability will be).

Accept Risks to achieve a higher profitability on investment

If we start from the premise that the investor accepts assuming risks in order to achieve a higher profitability for his investment, we deduce that the difference between the expected profitability (revenue) of the chosen assets in the entire portfolio and the “sans risk asset” yield is the market risk premium. In addition, each of the assets that comprise the portfolio has its own risk premium, and according to this model we establish that the individual premium in each asset is proportional to its beta.

Capital Asset Pricing Model

In 1952, Harry Markowitz laid the foundations that govern the risk-profitability relation while studying investment portfolio development. According to these studies, before choosing subject investment assets, we should first know which is the mathematical expectancy of each of them and also their standard variance or deviation, and once this results are known, then make a decision.

STOCK PORTFOLIO VALUATION MODELS

 If we come across to an investor who is simply not able to endure any risk, perhaps the best asset we can advise would be US Treasury bonds. Up until now, this has been considered the lowest risk asset by everyone.

In that case, that instrument’s issuer is, whereof its name, the US Treasury, and to think that it could enter a cease payment (default) is simply impossible. But what would happen if you, my investor friend, want to earn a little “extra”… and is willing to accept larger risks in turn of better profitability.