Statistics is one of the most important tools in analysis in portfolio investment. By using statistical tool the portfolio manager can derive the return and Risk of the portfolio. Based on the analysis derive through statistical tool the portfolio manager decide which stock should be include the portfolio and which stock should not. Statistical concepts are widely used concept in portfolio investment.
For determining the risk the portfolio managers uses various statistical tool which is shown below:
1. Standard deviation
Standard deviation tells the fluctuation in stock price in the specified period of time. If Fluctuation in stock is less, standard deviation of the stock is less and risk of fluctuation is also less.
Variance tells about the variation the stock price over the period of time. If variation in stock price is less, standard deviation is also less, so risk is also less.
Covariance tells about change in stock price which respect to change in market. If stock changes according to market then covariance of stock which market is less
Correlation tells about relation of stock with another stock or with market. It shows how stock price change in change in other stock and the market condition.
Derivative is defined as an investment Strategy which helps investor in minimizing the risk. Derivatives are a contract between two parties to sell or buy an underlying asset at specified price at specified period of time.
There are so many types of derivatives which are uses in minimizing the risk, but major four type of derivative is mention below:
1. Forwards Contract
2. Futures Contract
Hedging is an investment strategy which uses various strategic tools to investing in various assets. Major strategic tool for hedging is taking long/Short position to protect future changes in the prices of underlying assets.
If spot price less than future price then in short position investor gain and in long position investor loss. If spot price increase from future price then in short position investor loss and in long position investor gain.
An existing portfolio will try increasing the expected portfolio returns by maintaining or lowering the portfolio risk. The way needs to be considered in which the portfolio risk may have been affected when two investments are combined. The mean returns for portfolios are calculated by taking the weighted average of the mean returns for each investment in the portfolio.
Nowadays, it is being noticed that there is an increasing number of investors especially large institutional investors for investing on global basis.
The reasons an investor should consider investing globally are as follows:
Increasing opportunities: The number of opportunities all over the globe is increasing which is one of the main reason investors are investing globally as many countries are developing mortgage-backed securities and other instruments as well.
Development of indexes: Indexes measuring the historic returns for commercial real estate are also being developed in the other countries which allow investors for having a benchmark for the performance of real estate.
Diversification benefits: Including real estate from other countries in a portfolio provides diversification benefits and promotes investing globally which helps in reducing portfolio risk in case the expected returns in other countries are favorable.
Hence, investing globally must be considered in order to diversify portfolio risk and achieving higher returns.