Efficient Diversification
Discuss:
“The concept of efficient diversification implies that for an investor wishing to efficiently assume risk in their portfolio; the risky part of the portfolio should consist of weighted proportions of all possible risky assets.”
Abstract: Minimizing investor’s portfolio risk was a dominant goal influencing decision making of investment. The effective method of reducing risks was to efficient diversifying the portfolio. The author’s purpose in this article was to share thoughts and concerns about the statement and analyze whether investors actually followed the concept of efficient diversification in their investment.
Efficient diversification was a term familiar with most investors. The concept of the term suggested that putting all of your eggs in one basket was a risky decision. (Bodie, Kane and Marcus, 2009) Efficient diversification was an organizing principle of modern portfolio theory, which largely defined by the work of Harry Markowitz (1991), maintaining that any risk-averse investors would pursue after the highest expected returns for any particular level of portfolio risks. Essential efficient diversification meant that for an investor who wanted to take risks in their portfolio, then he should select a proportion of all possible assets that existed in the world.
The objective of efficient diversification was to minimize the portfolio risk with broadly possible investments. By holding a very widely diversified portfolio containing the investments of numerous risky assets in different economic spheres, the risks in the investment portfolio could be dramatically reduced. Securities market as a platform which large amounts of capital traded on was a typical model of the overall financial market. In the stock market, price volatility measured the variance of portfolio return. The greater fluctuation in shares prices, the more risks an investor would bear in holding these particular securities. The following part of this article was going to
“The concept of efficient diversification implies that for an investor wishing to efficiently assume risk in their portfolio; the risky part of the portfolio should consist of weighted proportions of all possible risky assets.”
Abstract: Minimizing investor’s portfolio risk was a dominant goal influencing decision making of investment. The effective method of reducing risks was to efficient diversifying the portfolio. The author’s purpose in this article was to share thoughts and concerns about the statement and analyze whether investors actually followed the concept of efficient diversification in their investment.
Efficient diversification was a term familiar with most investors. The concept of the term suggested that putting all of your eggs in one basket was a risky decision. (Bodie, Kane and Marcus, 2009) Efficient diversification was an organizing principle of modern portfolio theory, which largely defined by the work of Harry Markowitz (1991), maintaining that any risk-averse investors would pursue after the highest expected returns for any particular level of portfolio risks. Essential efficient diversification meant that for an investor who wanted to take risks in their portfolio, then he should select a proportion of all possible assets that existed in the world.
The objective of efficient diversification was to minimize the portfolio risk with broadly possible investments. By holding a very widely diversified portfolio containing the investments of numerous risky assets in different economic spheres, the risks in the investment portfolio could be dramatically reduced. Securities market as a platform which large amounts of capital traded on was a typical model of the overall financial market. In the stock market, price volatility measured the variance of portfolio return. The greater fluctuation in shares prices, the more risks an investor would bear in holding these particular securities. The following part of this article was going to
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