So far our discussion of the portfolio management process has considered broad asset classes. The discussion of the M-V framework addressed the big picture, seeking to match overall asset class weightings to individuals' or institutions' return objectives, risk preferences, time horizons, and investment constraints. That is, the focus has been to determine the overall allocation to equities, not the allocation to individual equity securities.
Stock portfolio managers focus on equity securities. There are two main types of equity: common and preferred. Preferred stock generally has a defined dividend that must be paid before dividends are paid to common stockholders; as a result, the price behaves much like a bond, especially if the dividend is secure. Common stock is more volatile; it represents an ownership share in the company, which can mean big payoffs if the company performs well or losses if the company does poorly. Company performance is typically measured by the level and growth of earnings and cash flow. As opinions about the company's prospects change, the stock price changes as investors trade on these changing opinions. The ...