Would you make an investment if there was another option offering better return potential for the same amount of risk or lower risk for the same level of return?
We’ve previously discussed managing risk through passive investments and diversification. But how does an investor compare risk between investment options?
The answer may be based in Modern Portfolio Theory. This investment framework seeks to maximize expected returns for a given level of risk. The Theory recognizes that the risk and return characteristics of a single investment should not be viewed on its own, but rather how it impacts the overall investment portfolio.
Diversification across multiple assets may lead to lower risk than owning a single investment. Modern Portfolio Theory takes this principal a step further by considering the relationship between investments. By investing in assets which are not perfectly related to each other, investors may be able to achieve the same portfolio expected return while managing risk.
Investment Property Wealth Management® helps bridge the gap between real estate investing and sophisticated wealth management. Taking into account an individual’s unique objectives and preferences, a Realized Portfolio™ incorporates Modern Portfolio Theory, which attempts to maximize your return relative to the risk you are comfortable taking, or manage risk relative to your target return.