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meaning and benefits of 'diversification in financial markets - Essay Example
Author : qabshire
Pages 5 (1255 words)
Diversification in financial markets Diversification in financial markets Diversification in financial markets should be approached with a lot of caution. The investor should do an analysis of the different portfolio options and their profitability in the preceding years…
Some markets can be stable with a clear direction while others move up and down without any clear direction. Such markets are said to be volatile and investing in them can be extremely risky. A lot of volatility increases the chances of losing especially if the capital is not large enough to caution the investment from the volatility (Smith and Schinasi, 1999). Allocating Capital The amount of money to invest in each of the markets or instruments solely depends on the investor. There is a percentage of risk the investor is comfortable investing in each of the chosen portfolios. This should also work together with the behavior of the markets in the last few months or years. An investor can invest more percentage of the capital in stable markets and instruments as there is little or no risk. Volatile and unstable markets should only be allocated a small percentage of the capital. In fact, investors should avoid trading volatile markets. If all the markets of interest are very volatile, the investor should consider waiting for volatility to come down before investing. Diversification in the financial markets has many advantages, including; Guaranteed profits: diversification in financial markets almost guarantees profitability. This is because even in the worst-case scenario, some of the markets and instruments will generate profits. ...
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