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Financial Investment Analysis - Essay Example
Author : nrodriguez
Finance & Accounting
Pages 5 (1255 words)
Efficient Diversification: The Risky Part of the Portfolio Should Consist of Weighted Proportions of all Possible Risky Assets Name Intuition Date Introduction At a time when the global economy is in crisis, corporations and firms are in serious challenge to maintain their desired profit margins and at the same time generate enough cash and liquidity to run their daily operations (Baker 2006)…
This, particularly, must be challenging for companies with global operations that may have their cash balances fragmented across different geographies, banks, and bank accounts which make accessing cash difficult (Huang 2003). In this regard, this paper seeks to address the issue of efficient diversification as a comprehensive strategy in liquidity and stock return. Liquidity of an asset explains the ease with which an asset can be sold after its purchase without incurring further losses and how risks can be mitigated if not minimized (Baker 2006). The various losses that could be incurred may be due to the various transaction costs or price changes or poor investment strategies. Thus the main aim of this study shall be to examine how proportionate efficient diversification increases the neutralization of low pricing and promising high returns (Elton et al. 2007). The paper holds that efficient diversification must there is a potential benefit when risky part of portfolio consists of weighted proportions of all possible risky assets. Naive and Efficient Diversification Studies done on investment on stock markets and equity securities have documented the relationship that exists in weighted portfolios (proportionate or otherwise on risky assets). Broadly speaking, there two causes of uncertainty. ...