The concept of diversification is familiar to all

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Unformatted text preview: of their portfolio risks. The concept of diversification is familiar to all students of finance: Basically, as long as the returns on different investments are not perfectly positively correlated, by exploiting the benefits of size FIs diversify away significant amounts of portfolio risk—especially the risk specific to the individual firm issuing any given security. Indeed, experiments in the United States and the United Kingdom have shown that diversifying across just 15 securities can bring significant diversification benefits to FIs and portfolio managers.4 Further, as the number of securities in an FI’s asset portfolio increases, portfolio risk falls, albeit at a diminishing rate. What is 3 For a further description and discussion of the special or unique nature of bank loans, see E. Fama, “What’s Different about Banks?” Journal of Monetary Economics 15 (1985), pp. 29–39; C. James, “Some Evidence on the Uniqueness of Bank Loans,” Journal of Financial Economics 19 (1987),...
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This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.

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