The effect of economic factors on the performance of the Australian stock market

Abstract

Portfolio theory, created by economists, was a breakthrough in financial economics. This theory looks at the stock market as a whole and analyses how, for a given rate of expected return, assets can be invested efficiently and how risk can be minimized. An effectively diversified portfolio minimizes the unsystematic risk which is affected by factors that are specific to the individual firms and, to some extent, the industry in which the firm operates. The unsystematic risk is, therefore, manageable by diversification. The systematic risk, however, cannot be managed by a simple approach of diversification. Despite the fact that there are many other factors contributing to the systematic risk of a portfolio, the risk and return of a diversified portfolio is mainly affected by domestic and overseas economic factors.

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