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Unformatted text preview: of the individual securities in the
n σ ≠ ∑ wiσ
i Risk Reduction in Portfolios
Risk Assume all risk sources for a portfolio are
The larger the number of securities the
smaller the exposure to any particular risk
Only issue is how many securities
how Risk Reduction in Portfolios
Risk Random diversification: Diversifying without
looking at relevant investment characteristics
Marginal risk reduction gets smaller and smaller
as more securities are added
A large number of securities is not required for
significant risk reduction
International diversification is beneficial
International diversification Portfolio Risk and Diversification
Portfolio risk 35 20 Market Risk 0
10 20 30 40 ...... Number of securities in portfo...
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This note was uploaded on 12/10/2011 for the course FIN 401 taught by Professor Staff during the Spring '08 term at Miami University.
- Spring '08