Let me first define risk. Risk is not the risk of losing money here. Risk is the standard deviation from the expected returns. So if you expect Reliance to give 30% return in one year, then risk is the percentage it will miss the expected return. A portfolio manager will tell you that Reliance has a low risk and will deviate by +-5% or so. (the figures are only for explanation). Lets say a Jai Corp is also exptected to give 30% return. But the risk here is high. It may deviate by 15%.
In short an investor will take on more risk provided he is compensated by a higher return. On the flip side, an investor will bear more risk if he wants a higher return.
Why portfolio? A portfolio is a mix of assets. The idea is to diversify and not put all eggs in one basket. At the same time, create a portfolio that balances the risk return to suit your need. Lets say- you want both a Relaince and a Jai Corp AND try to get a higher return on a lower risk, by MIXING the two in the right proportion. The portfolio then has its own risk and return profile.
So how to have the right mix? This depends on the characteristics of individual investor. I would not suggest the same asset to both a retired person with no source of income and also to someone who has started a great career. There are a host of things to be considered. .e.g. Risk appetite, investment horizon, liquidity concerns, tax concerns, etc. before designing an optimum portfolio that suits an investors risk and return profile.
If you want and are able ( a portfolio manager will ascertain both) to take more risk, your portfolio will have a higher weightage of risky assets. And Vice versa. Portfolio returns are weighted average of individual assets in its compostion. The formula for the portfolio risk is a lot complicated. I have the code written somewhere.
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