Traditional Portfolio Approach

One of the most difficult decisions faced by today’s markets is to select the assets in the portfolio for investors. Moreover, the personal characteristics of investors may be decisive about the structure of the portfolio by considering the financial risk. Indeed, some investors are bearing the risk and some are behaving more cautious and tend to maintain their capital. In this regard, risk is as an important element in the management of portfolio. The ratio or amount risk investors maintain will be determined by the types of entities to be included in the portfolio. However, the rate of assets in the portfolio is great importance as the types of assets being selected in the portfolio. In fact, according to Katy Marquardt the most important decision for an investor should be which securites are not included in the portfolio securities should be to determine what proportion of assets and which asset will distribute (Marquardt 2008). The main purpose of the traditional approach is that the investment portfolio consists of asset types and number as much as possible. The loss or profit of the value of assets in financial markets can not be predicted. Inspite of some prediction methods, sometimes subjective value can be effective to portfolio configuration (Düzel 1997, pp.68). This feature is unique to the traditional approach and because of the feature consisting some concepts such as experience, intuition the traditional approach leads to carry to the nature of art than a science.

The most obvious advantage of diversification in the traditional approach is the distribution of risk. An investor‟s portfolio should contain certain types of securities, this behaviour can be very effective on the distribution of portfolio return and risk. According to Bank Investment Consultant (2006, pp. 36), the trend of a single security could be different to the trend in financial markets, but the trend followed by the diversification of the portfolio of different assets quite _n deve to the trend in financial markets. As some of the assets within the portfolio depreciated over a certain period, others earn value. Even during the most pessimistic crisis periods, the fluctuations on the returns of assets with the different trends may compensate losses due to movements in different directions. Seasonal variability of assets must be analyzed well in advance in terms of portfolio diversification. Acording to Michael Branham, to keep various types of assets in portfolio is similar to form a baseball team whose have different capabilities. However, in order to implement this, the portfolio consists of different return potential of assets at different times. Assets in financial markets volatility refers to the risk of that asset, or in other words, refers to the possibility of not being able to achieve the expected return (Harrington 1987, pp. 79). Therefore, assets with less variability is preferred by investors. The variability level of assets in portfolio directly affect the portfolio return and the level of stabilization. Well-diversified portfolio shows a high rate of return and high stabilization (Marquardt 2008, pp. 92). According to Marquardt, this situation is a financial description to buy a cake _n deven to have the opportunity of taste it. Returns of the securities consists of two parts as dividends and periodic value increase.

The expected return on the portfolio is equal-weighted averages the expected return on assets in the portfolio. In an extreme case, assuming that all assets in the portfolio have the same expected return, the expected return on the portfolio is understood to be the same. As a result of this, the returns of securities in portfolio will not move in the same direction and the risk of the portfolio is lower than the risk of a security. Thus the traditional portfolio theory is based on the principle of increasing the number of securities in the portfolio (Bolak 2001, pp.25-30). Although how diversification needs to be done is a subjective phenomenon according to the traditional approach, according to some analysts it is an application that has got sharper rules. Historical data, some criteria such as personal characteristics of the investor are some of the factors that determine to which ratio the assets distributed in the portfolio. The traditional approach to the management of securities will include in the investor’s objective determination, the selection of securities in portfolio and portfolio management stages.

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