Diversification of the Risk of Portfolio
Diversification of the portfolio can be done through the selection of the securities which have negative correlation among them which formed the portfolio. The return of the risky and riskless assets are only having the possibilities to bring down the risk of the portfolio.
The following example will certainly facilitate to understand the diversification process of the securities in the portfolio through the correlation co efficient of the returns of the securities which formed the portfolio:
The above table reveals that Portfolio AB is the better one to diversify the risk as minimum as possible, the reason is that the returns of the respective securities are having negative correlation among A&B unlike A &C. The negative correlation of the returns between the A&B only facilitated to reduce the risk to the levels of minimum.
The risk of the portfolio cannot be simply reduced by way adopting the principle of correlation of returns among the securities in the portfolio. To reduce the risk of the portfolio, the another classification of the risk has to be studied, which are as follows:
The risk can be further classified into two categories viz Systematic and Unsystematic risk of the securities
Systematic Risk - which cannot be controlled due to market influences which is known as Uncontrollable risk, cannot be avoided
Unsystematic Risk-Which can be minimized or reduced this type of risk through diversification of the securities in the portfolio
Systematic Risk: Which only requires the investors to expect additional return / compensation to bear the
Unsystematic Risk: The investors are not given any such additional compensation to bear unlike the earlier.
The relationship could be obviously understood through the study of Capital Asset Pricing Model (CAPM).
Accounts and Finance for Managers Related Tutorials
Accounts And Finance For Managers Tutorial
Financial Statement Analysis
Fund Flow Statement Analysis
Cash Flow Statement Analysis
Cost Accounting & Preparation Of Cost Statement
Time Value Of Money
Sources Of Long Term Finance
Capital Market Developments In India
Indian Financial System
Sebi In Capital Market Issues
Risk And Return
Cost Of Capital
Capital Structure Theories
Working Capital Management
All rights reserved © 2018 Wisdom IT Services India Pvt. Ltd
Wisdomjobs.com is one of the best job search sites in India.