WEBVTT 00:01.260 --> 00:04.810 Welcome to the first section on financial portfolios. 00:04.950 --> 00:10.740 If you're not too much familiar with financial portfolios then he has a short definition. 00:10.740 --> 00:17.100 So our financial portfolio is a collection of investments held by an investment company a financial 00:17.100 --> 00:23.760 institution or an individual and actually an investment can be everything so it can be stocks bonds 00:23.760 --> 00:27.530 funds real estate commodities and many more. 00:27.540 --> 00:30.310 And in this course we will focus on stocks. 00:30.450 --> 00:33.430 So how can we characterize their portfolio. 00:33.440 --> 00:34.260 And. 00:34.290 --> 00:40.550 First of all we have the assets are the investments that are included in the portfolio. 00:40.590 --> 00:44.970 And second we have the votes of the portfolio assets. 00:45.120 --> 00:52.190 And with this information we can analyze portfolios and also calculate the return and risk of portfolios. 00:52.380 --> 00:58.080 And actually the performance of a portfolio is not simply the weighted average of the single investments. 00:58.080 --> 01:05.790 So this holds true for the return but typically the portfolio risk is less than the evaded average risk 01:05.790 --> 01:13.610 of the assets or investments included in the portfolio and that's the portfolio diversification effect. 01:13.620 --> 01:19.920 And the major reason why an investor should hold diversified portfolios rather than single investments 01:20.640 --> 01:21.880 are right. 01:22.110 --> 01:26.040 And we have some implicit assumptions here in the section. 01:26.040 --> 01:32.370 So we are working with a small subset of the total market and we are creating portfolios with only six 01:32.370 --> 01:32.820 stocks. 01:32.820 --> 01:36.240 For example we have Amazon and Microsoft. 01:36.240 --> 01:42.270 And sometimes that might seem like we pretend that these are the only available stocks in the market. 01:42.270 --> 01:48.030 So for example when we are going to search the best or the optimal portfolio then it's meant the best 01:48.030 --> 01:52.510 portfolio that we can create with these six stocks. 01:52.890 --> 01:56.710 And for these six stocks that we are analyzing the past performance. 01:56.850 --> 02:04.290 So typically portfolio construction is in most cases a forward looking task to create appropriate portfolios 02:04.440 --> 02:10.140 that are successful in the future but forward looking means that we have to make a lot of assumptions 02:10.140 --> 02:12.770 involving quite a lot finance theory. 02:13.320 --> 02:18.200 And that would actually take the focus from our pandas coding. 02:18.210 --> 02:24.640 And that's why we simply analyze the past and the coding workflow so actually pretty much the same. 02:24.660 --> 02:31.320 And once you have understand how to grade and analyze portfolios based on historical data it's only 02:31.320 --> 02:37.930 one step further to go into the future and this section we are going to create many random portfolios 02:37.960 --> 02:45.190 and analyze the performance of these portfolios and random means that we randomly selected the weight 02:45.250 --> 02:53.440 of our six stocks saw for example and one random portfolio the weight of the Amazon stock is 20 percent 02:54.070 --> 02:58.840 and in the other random portfolio the rate for Amazon is 60 percent. 02:59.500 --> 03:04.240 And finally there's one assumption that is in real world to hard to maintain. 03:04.270 --> 03:10.930 So we are analyzing our random portfolios over the last five years based on daily data and we assume 03:10.930 --> 03:13.610 that the rates remain constant over time. 03:13.720 --> 03:19.420 Typically at the end of each day we would need to sell winners and buy losers to maintain the weights 03:19.960 --> 03:25.560 and the the explicit assumption is that we can do this without costs and taxes. 03:25.600 --> 03:33.880 So this might not be a realistic and simplifying but this enables us to put the focus on the more interesting 03:33.880 --> 03:34.800 things. 03:35.060 --> 03:35.590 All right. 03:35.590 --> 03:40.720 This is enough introduction and in the next video we start coding our portfolios. 03:40.720 --> 03:42.370 So to see it there by.