¶ … Diversification
Portfolio diversification as a form of risk management is one of the cornerstones of modern investment theory. According to the theory, the ideally-diversified portfolio is 'deeply diversified' within each asset class and also 'broadly diversified' across all the asset classes within the portfolio (Simon 2010:2). Asset classes consist of "stocks, bonds, real estate, commodities, precious metals and collectibles;" forms of market capitalization (micro-, small-, mid- and large-cap); style; sectors; industry types; and geography (Portfolio diversification, 2012, Investing in mutual funds). The objective of diversification is that "risk has virtually been eliminated within each class" by combining lower and higher-risk assets (Portfolio diversification, 2012, Investing in mutual funds). Theoretically, the perfectly diversified portfolio should incur no additional risks to the investor greater than what is posed by the general market conditions. There is always risk in investment, but portfolio management is designed to minimize the risk.
To achieve this objective, modern portfolio theory uses the Efficient Frontier model, which is based upon a "simple geometric graph of the trade-off between risk and return. The frontier itself is a composition of many portfolios, Portfolios on the frontier provide a return to risk premium over any of the assets that combine to create the portfolios." (Portfolio theory, 2010, Gravity Investments). The Efficient Frontier model was so revolutionary because "rather than accepting two variables, risk and return, it incorporates a trans-dimensional factor: diversification. Diversification optimization assigns each asset a vector by locating each vector in a direction that best explains the correlation with the rest of the assets. The vector lengths are set to a utility function, usually including...
Theory (MPT) and its role in asset allocation and diversification. The paper reviews arguments in favor of and against MPT, in addition to reviewing how MPT affects portfolio management. MPT describes a theory on how risk-averse investors can build portfolios that optimize or maximize expected return based on a given level of market risk, while emphasizing that risk is an inherent factor of higher reward. MPT posits that it is
These types of investments are often illiquid, so the investor needs to view them as long-term investments. However, the lack of liquidity also means that for the most part they have low levels of correlation with the broad market. Derivatives are another possibility, and their potential impact on the portfolio will be discussed in the next question. They can either increase risk or decrease risk, depending on the type of
The specific makeup of this portfolio is uncertain, but its characteristics are relatively set. The other component of the portfolio is the risk free asset. What the constructor of the ideal portfolio will do, in essence, is determine the blend of the optimum risky portfolio and the risk free asset, based on the investor's own risk tolerance. The higher the risk tolerance, the more of the risk-free asset would be
A common thread through these fifteen stocks is that they not only represent diversification as a group, but most of the companies chosen also have a range diversification within the company's operations. The companies are spread around the world, and include a number of sectors. For example, within technology the portfolio has access to the health care sector through Cerner; within ADRs there is exposure to the Internet, chemicals and
Portfolio Management In the project portfolio management context, a portfolio is an aggregation of active programs, projects and other business activities that indicate an organization's priorities, investments and allocation of resource (The standard for portfolio management, 2008). According to the editors of PM Network, "Portfolio management is the centralized management of one or more of those portfolios to achieve specific strategic business objectives" (2008, p. 75). Using project portfolio management
Finance The portfolio I constructed consists of Google and Apple. The rationale for this seemingly simple portfolio is actually quite complex. The portfolio maximizes my long-run wealth, and this paper will explain how this will work. The bottom line for me is that no other portfolio was going to deliver the same benefits as a 50/50 portfolio of these two technology giants. Description of the Portfolio Portfolio theory holds that a diversified portfolio
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