Although arguably, an imperfect translation -attributed to Peter Motteux- from the Spanish language in the early 1700s of Don Quixote states that Sancho said: “It is the part of a wise man not to venture all his eggs in one basket” (Miguel de Cervantes). This sentence has become one of the most used in explaining portfolio diversification. Clearly, if you drop or lose the basket, you will lose all the eggs (or almost all the eggs). However, building a well-diversified portfolio is not a trivial task. What does an investor need to consider to build a well-diversified portfolio?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Although arguably, an imperfect translation -attributed to Peter Motteux- from the Spanish language in the early 1700s of Don Quixote states that Sancho said: “It is the part of a wise man not to venture all his eggs in one basket” (Miguel de Cervantes). This sentence has become one of the most used in explaining portfolio diversification.
Clearly, if you drop or lose the basket, you will lose all the eggs (or almost all the eggs). However, building a well-diversified portfolio is not a trivial task.
What does an investor need to consider to build a well-diversified portfolio?
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