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Unformatted text preview: portfolio without thinking. Research shows that diversification reduces necessary risk by about 75%, meaning that when you invest, only 25% of what you put into the market is really “vulnerable” to loss at any given time. Suppose two securities have perfect negative correlation. Would it make sense to invest in these two securities only? No it would not. The two securities cancel each other out when one is high; the other is low to correspond correctly. Combined in the same account, they will achieve a lower rate of return, but also will cancel the risk along with it. Having other securities in the portfolio will only help you benefit in the long run, and achieve and even higher return....
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This homework help was uploaded on 04/18/2008 for the course MGT 3440 taught by Professor Gummerson during the Fall '07 term at St. Scholastica.
- Fall '07