The management of financial portfolios is an activity that aims to combine financial products in a manner that best represents the investor's needs. This requires an overall assessment of various characteristics, such as risk appetite, expected returns, and investor consumption, as well as an estimate of future returns and risk.
In order to optimize a financial portfolio, we start by measuring the yield and risk of the products available. The risk-return variables can be considered two sides of the same coin, since a certain level of risk will correspond to a given return. The return can be defined as the sum of the results produced by the investment in relation to the capital employed, while the concept of risk can be translated into the degree of variability of returns associated with a given financial instrument.
The following diagram shows...