Investing In Canada

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Investment Theory

Thursday, September 13, 2007

Investment Theory

Investment Theory

Modern Investment Theory or Modern Portfolio Theory can become quite complex; however, the basic theory of investing revolves around a couple of key concepts: capital is a scarce resource, and return is a variable of risk. In other words, money available for investment is not infinite so people are willing to pay to borrow it and generally, the greater the risk associated with an investment, the greater the potential rewards.

The goal of portfolio theory is to diversify your investments in a way that will maximize your returns while minimizing the risks associated with those returns. This is done by investing in a number of different investment vehicles as well as investing in a number of uncorrelated/unrelated industries.

For example,
40% Fixed Income (bonds, debentures, commercial paper), 40% equities (stocks), 15% cash (GICs, term deposits, savings account), 5% derivatives (options, futures)

Further, within these fields your investments should be diversified through unrelated sectors:
Resource, Financial, Technology, Health Care, Industrial, etc.

This is not an exhaustive list but a very basic outline. Each individual is faced with a unique set of qualities that will effect how much they should invest in certain sectors and how much they should invest in each type of security.

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