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Finance Principles - Essay Example

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Undergraduate
Essay
Finance & Accounting
Pages 8 (2008 words)

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FINANCE PRINCIPLES Table of Contents Table of Contents 2 A.Portfolio Diversification 3 Mean – Variance Diversification 4 Efficient Frontier 5 B.Construction of Diversified Portfolio 6 References 12 Bibliography 13 A. Portfolio Diversification Portfolio diversification can be defined as the designing of a portfolio which includes several assets like stocks, bonds, commodities, etc…

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Finance Principles

It can be explained as, if one of the asset in the portfolio is giving negative return, then it would not have a significant impact on the overall return of the portfolio because the other assets might be performing well and thus making up for the asset which is not performing well. Diversification helps an investor to have consistent return on its portfolio over a period of time. An investor who is risk-averse in nature would always strive to have a completely diversified portfolio in order to minimize risks associated with it. Quantitative measure of portfolio is possible with the advent of several portfolio selection theories. Using those quantitative measures one can have the benefits of diversification to the maximum amount possible. The diversification strategy proposed by Markowitz is based on the covariance between the returns generated by the assets included in a portfolio. The diversification theory proposed by Markowitz is related to the risks associated with the portfolio as a whole and not the risk associated with any asset in isolation. Markowitz used variance as a measure of risk. ...
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