That being said, the overall risks to the portfolio will vary, depending upon the type of stock that is purchased and how much diversification is being utilized. ("What are the Main Types of Stock.," 2010)
How much does a stock contribute to the return of a portfolio?
Historically the average return of the S&P 500 has been 9.8% a year. (Swedroe, 2009) However, the overall impact of the return will depend upon: the underlying amounts of growth and dividends that are received. These two factors are important, because they can cause the total return of the portfolio to vary. As a result, the overall contribution of stocks, on the return of the portfolio; will depend upon the type of equity securities that are being purchased and the holding period.
Clearly, the underlying amounts of risks and rewards will depend upon a number of different factors. As far as risks are concerned, the biggest issues would be: the amount of diversification that is used and the type of stocks that are purchased. These are important, because they will determine the possible risk that different stocks will have upon the portfolio. As those equity securities that are more income orientated, will have less risk in comparison...
The return of the portfolio will depend upon the amount of dividends and growth that are received. Where, these two factors will determine the total return that will be seen at the end of the year. As they will be affected by: the type of stock that was selected and the holding period. When you put these different elements together, this highlights how various stocks will affect the way investors are viewing risks vs. rewards. Where, those stocks that can deliver consistent results will be considered less risky, with the possibility of delivering higher returns.
Bibliography
Diversification. (2010). Invest Words. Retrieved from: http://www.investorwords.com/1504/diversification.html
How Far Have We Fallen. (2009). Ritholz. Retrieved from: http://www.ritholtz.com/blog/2009/02/bear-market-comparisons-1929-2009/
What are the Main Types of Stock. (2010). MSN Money. Retrieved from: http://moneycentral.msn.com/quickref/quickref.asp?Cat=10&SelCat=3&RefType=0&QAMode=2&Topic=7&Sub=9
Swedroe, L. (2010). Are Stocks a Good Buy. Money Watch. Retrieved from: http://moneywatch.bnet.com/investing/blog/wise-investing/are-stocks-a-good-buy/1465/
