Principles of Portfolio Management

Chapter: 11 Principles of Portfolio Management

Section: 3 Portfolio Diversification and Risk

Diversification refers to building a portfolio, which includes different classes of derivatives or investments. In a portfolio consisting of various classes of investments, when there is a drop in value of one class of asset, another class of asset value may go up and thus the portfolio as a whole is stable and minimizes the risk.

 

The above can be illustrated graphically as follows:

 

Assume that we have two stocks A and B, A’s performance graph is as shown below:


B' performance graph is shown below:

If stock A and B are in one portfolio, the performance of the combined investment would be:

The above graph clearly depicts the following:

 

  • A and B as individual stocks are risky as the returns are fluctuating over time
  • When they both are held in a portfolio, the average return is stable and higher than the individual return 

logo

Financial Information Co.

(MITCO), P.O. Box 69410, Riyadh 11547, Saudi Arabia

GCC Markets

Mutual Funds

News

Investment Tools

Sector News

Screeners

Indices & Commodities

Downloads

Copyright ©2001 - 2024, Financial Information Co. All Rights Reserved.

Terms of Services | Privacy Policy | Advertise with us | Contact Us | Sitemap