1. Introduction to Portfolio Theory

Two basic principles of Finance form the basis of Portfolio theory, namely, Time value of Money and Safety of Money.

Rupee today is worth than rupee of tomorrow or a year hence and as parting with money involves the loss of present consumption, it has to be rewarded by a return commensurate with time of waiting. Secondly, a safe rupee is preferred to an unsafe rupee at any point of time. Due to risk aversion of investor, they feel risk is inconvenient and has to be rewarded by a return. The larger the risk taken, the higher should be the return.

Present values and future values are related by a discount factor comprising of firstly the interest rate component and secondly the time factor. The future flows are to be discounted to the present by a required rate of discount to make them comparable and equal in value.

As regards the risk factor, there is a direct relationship between the expected return and unavoidable risk. Avoidable......

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Title: Portfolio Management
Approximate Word Count: 579
Approximate Pages: 3 (250 words per double-spaced page)

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