We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Economy

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is an Investment Theory?

Malcolm Tatum
By
Updated: May 16, 2024
Views: 25,434
Share

An investment theory is a concept that is based on consideration of a number of different factors associated with the process of investing. Ideally, the theory will involve looking closely at a wide range of factors to determine how to go about choosing the right investments for a particular goal or purpose. While there are approaches to investment theory that involve employing a number of other theories as part of the process, some economists break down the task into four areas that just about anyone can grasp.

The first key factor in investment theory has to do with the goals for the investment portfolio. By determining how to diversify the portfolio while still balancing that diversification with the type of individual securities, the idea is to protect the investor from downturns in one market by providing for upswings in value with other holdings. Known as modern portfolio theory, this factor is key to the investment process for investors who have specific goals for the income generated by the portfolio.

Another important aspect of investment theory has to do with evaluating investments based on the degree of risk and potential return. Here, the idea is to help the investor focus on options that carry an acceptable amount of risk while providing the greatest amount of return. This element is the basis for the capital asset pricing model, and can make a big difference in whether or not an investor makes the right choices for his or her portfolio. A similar approach, known as the arbitrage pricing theory, focuses more on assessing the degree of risk associated with a given investment option, but still serves the purpose of helping an investor decide if the potential return is worth the volatility associated with a given option.

A well-crafted investment theory will also consider the amount of information available about both the investment option and the general condition of the market or markets where the option is traded. Known as the efficient market hypothesis, this concept holds that all information that is relevant to making the decision to hold, buy, or sell an option must be readily available to the investor in order for the market to be truly efficient. Since knowing the past history, the current status, and the potential future risks associated with any investment is key to being able to make wise choices, the investor should determine if this situation of an efficient market exists before deciding to get involved with a given investment.

Essentially, an investment theory is all about making informed investment decisions. By taking into consideration the goals and aims of the investor, it is possible to build a portfolio that will help meet those goals. In order to wisely choose the right investments, it is important to know all there is to know about the investment and the market in which it is traded. Developing an investment theory that encompasses all these factors will greatly increase the chances for success, as well as aid the investor in avoiding investment options that are not in his or her best interest.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.smartcapitalmind.com/what-is-an-investment-theory.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.