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Finance & Accounting
Pages 5 (1255 words)
Topic: Investment and Analysis Name Professor Institution Course Date Modern Portfolio Theory The theory of modern portfolio implies that investor’s decision to address market risks is based on the fact that there are different combinations of investments in a portfolio.
Efficient Markets Theory The theory is based on the assumption that information available in the securities market such as price levels is extremely efficient in reflecting the performance of the assets in the market. The general view regarding the theory is that information spreads in the shortest time possible and gets incorporated in the prices of assets in the market (Hughes, 2005, p. 118). The theory disputes the ability of investors to use historical information in determining the fair value of securities in the market. I would like to point out that the conventional wisdom of wisdom may not necessarily break down in situations of extreme market volatility. This is because making investments is all about diversifying in the right manner using the relevant tools. In 2008 and 2009, there was the occurrence of a serious stock-market cataclysm that led to massive loss of wealth in the US. Market reports estimated that investors lost approximately $6 trillion worth of wealth. The stock-market cataclysm not only led to massive loss of wealth but also eroded investor’s faith in the conventional wisdom of diversification (Oberuc, 2004, p. 290). However, the failure of the diversification does not arise from the concept of diversification itself. This is because diversifying investments does work especially when done with the appropriate tools. ...
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