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The Power of Diversification summary

The Power of Diversification summary - diversification...

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The Power of Diversification Summary Group 10 Financial Management The Power of Diversification Most individual stock prices show higher volatility than the price volatility of a portfolio of all  common stocks. How can the standard deviation for individual stocks be higher than the standard  deviation of the portfolio?   Diversification:  The act of investing in many different assets rather than just a few, so as to  reduce   volatility. The ups and downs of individual stocks partially cancel each other out.  The risk that diversification eliminates is called unsystematic risk. The risk that remains, even in a diversified portfolio, is called systematic risk.  Systematic and Unsystematic Risk Diversification reduces portfolio volatility, but only up to a point. Portfolio of all stocks  still has a volatility of 19.8%. Systematic risk: the volatility of the portfolio that cannot be eliminated through 
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Unformatted text preview: diversification. Unsystematic risk: the proportion of risk of individual assets that can be eliminated through diversification What really matters is systematic risk…. how a group of assets move together. Risk and Return Revisited • For the various asset classes, a trade-off arises between risk and return. The Trade-off Between Risk and Return The Power of Diversification Summary Group 10 Financial Management • Investment performance is measured by total return. • Trade-off between risk and return for assets: historically, stocks have higher returns and volatility than bonds and bills. • One measure of volatility: standard deviation • Systematic risk: risk that cannot be eliminated through diversification...
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