Your good friend has recently inherited £20,000 and is planning to invest this money in financial instruments (equities, bonds, currencies)
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Recently, one of my good friend has inherited ￡20,000 and wants to invest this amount of money in financial market, in other words, she is planning to buy some financial products such as equities, bonds and currencies. She has asked me for some guidance. In my opinion, I think diversifying portfolio would be the best way to get a higher return. In this essay, I will explain the concept and benefits of diversification in financial markets. However, even with a diversified portfolio of investments, she still could suffer losses from a future financial crisis. Hence, I am going to explain the reasons for the losses in the essay as well.
When we talking about diversification in financial market, the first thing that we need to understand is that the meaning of ‘diversification in financial market’. Following my lectures, I understand that diversification is a risk-management technique that mixes a wide variety of investments within a portfolio in order to minimize the impact that any one security will have on the overall performance of the portfolio. For instance, investors hold a group of stocks which are chosen from different fields and different regions in order to minimize the risks. For example, assuming that you have ￡1 million to invest, you can invest the whole money in stock A or invest just 50% in stock A and invest another 50% in stock B. Let us make a hypothesis, the correlation between stock A and stock B is low. In the first case, if stock A goes from ￡2 to ￡1 per share, you lose 50% of its value, so the value of your portfolio end up with ￡500,000. If you invest 50% in stock A and 50% in stock B. The stock A goes ￡2 to ￡1 but the stock B, which has very rare in common with the stock A in terms of factors that affect its price, goes from ￡1 to ￡2. The result is that the ￡500,000 which you invest in stock A now worth ￡250,000(lost 50%) but the other ￡500,000 is now worth 750,000( rose by 50%). In this scenario, the portfolio goes from ￡1
Recently, one of my good friend has inherited ￡20,000 and wants to invest this amount of money in financial market, in other words, she is planning to buy some financial products such as equities, bonds and currencies. She has asked me for some guidance. In my opinion, I think diversifying portfolio would be the best way to get a higher return. In this essay, I will explain the concept and benefits of diversification in financial markets. However, even with a diversified portfolio of investments, she still could suffer losses from a future financial crisis. Hence, I am going to explain the reasons for the losses in the essay as well.
When we talking about diversification in financial market, the first thing that we need to understand is that the meaning of ‘diversification in financial market’. Following my lectures, I understand that diversification is a risk-management technique that mixes a wide variety of investments within a portfolio in order to minimize the impact that any one security will have on the overall performance of the portfolio. For instance, investors hold a group of stocks which are chosen from different fields and different regions in order to minimize the risks. For example, assuming that you have ￡1 million to invest, you can invest the whole money in stock A or invest just 50% in stock A and invest another 50% in stock B. Let us make a hypothesis, the correlation between stock A and stock B is low. In the first case, if stock A goes from ￡2 to ￡1 per share, you lose 50% of its value, so the value of your portfolio end up with ￡500,000. If you invest 50% in stock A and 50% in stock B. The stock A goes ￡2 to ￡1 but the stock B, which has very rare in common with the stock A in terms of factors that affect its price, goes from ￡1 to ￡2. The result is that the ￡500,000 which you invest in stock A now worth ￡250,000(lost 50%) but the other ￡500,000 is now worth 750,000( rose by 50%). In this scenario, the portfolio goes from ￡1