Can you help Mike understand the relationship between risk and return on his investment portfolio, calculate them and construct a perfect investment portfolio for his family?

Mike appreciates your help on tax planning. At the beginning of 2017, he invested $25,000 in two different stocks, but wants to know more about investment risk and return before risking additional capital. He knows there is a direct relationship between risk and return; however, his knowledge in this regard is very limited. He needs to understand the relative riskiness of different types of securities, namely, common stocks, bonds, preferred stocks and others, and learn to calculate the returns on different securities in order to make an informed decision on which securities to pick and how to re-allocate his family savings among different securities. He doesn't want to invest all the money in one particular security as this could be a very risky strategy, although he is not so sure about how diversification works. Also, given the increasing cost of living, Mike is concerned about the possible impact of inflation on his investment return. Furthermore, Mike heard about two different investment strategies -'active' and 'passive'. He is curious about how analysts evaluate a specific security. His goal is to earn a 'superior' return on his investment portfolio compared to the overall market.

Risk and Return:

1. What are the different types returns that different securities can generate?

2. At the beginning of 2017, Mike invested $10,000 in a Stock A that grew to $10,500 at the end of the calendar year, and the remaining $15,000 in Stock B that fell to $14,600 at yearend. He also earned some dividends on both stocks during the year - $400 on Stock A and $200 on Stock B. Calculate the weighted average nominal rate of return on Mike's portfolio. 2017 inflation was 2%. What was the real return on Mike's portfolio?

3. Rank the following securities based on expected risk and return in an ascending order (from the lowest to the highest): Common stocks, preferred stocks, bonds, debentures, treasury bills, and derivatives

4. What are the three measures of risk?

5. How would you measure the volatility of bonds? As interest rates are gradually rising, what do you expect to happen to bond prices?

Diversification:

1. What is the major benefit of diversification?

2. How does diversification work? In other words, how would you know which stocks to add to your portfolio to get the maximum benefit from diversification?

3. Mike wants to buy the Stock of CNRL, which is one of largest operators of Oil sands in Canada. Name a stock that is almost perfectly negatively correlated to CNRL.

4. Can you diversify all the risks in your portfolio? If not, what type of risk cannot be diversified?

5. How would you measure any undiversifiable risk, if there were any?

6. "Once there are 32 securities in the portfolio, additional risk reduction is minimal." Is the above statement true?

7. Mike is a subscriber to investment website, "seeking alpha"? He was wondering where that 'alpha' word came from. Can you explain him what 'alpha' is?

Investment strategies and Security analysis:

1. What do you mean by 'strategic asset allocation? How does the process work?

2. What is the difference between 'active' and 'passive' investment strategy? Is 'buying ETFs and Index funds' an 'active' or 'passive' investment strategy?

3. What do you mean by 'sector rotation'?

4. Explain Mike the difference between 'fundamental' and 'technical' security analyses.