Using Portfolio Theory to Balance Risk and Return

Qi Wan ()
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Qi Wan: Nanhu Campus, Wuhan University of Technology

A chapter in Proceedings of the 2024 2nd International Conference on Management Innovation and Economy Development (MIED 2024), 2024, pp 509-515 from Springer

Abstract: Abstract Investors prefer investing in different financial products in the capital market to earn higher returns—however, various financial products are changing constantly. Investors without relative information and tools can easily suffer some losses that can be easily avoided. So, the paper aims to provide a way for some investors to hedge risk and avoid nonsystematic risks. Based on Markowitz’s portfolio theory, the paper will use the mean-variance model to show how to construct an optimal portfolio and check the portfolio by using the Sharp ratio. Baidu, Walmart, and Tesla stocks were selected as examples because these stocks have a negative correlation. Then, the paper will discuss how to decide each weight of stock by analyzing the past return of each stock and making an efficient portfolio. Lastly, the portfolio shows excellent results, showing the specific meaning of portfolio theory. It has a significant reference and practical application for investors to make better decisions when they choose financial assets in the capital market.

Keywords: portfolio theory; investment decision-making; risk; return; diversification (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-542-3_59

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DOI: 10.2991/978-94-6463-542-3_59

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