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What is the purpose of diversification in an investment portfolio, and how does it reduce risk?
Step by step
Solved in 2 steps
- How does the size of the initial investment affect the internal rate of return on the net present value models?How do an investment's required rate of return vary with perceived risk? Explain with an example?What does it mean that portfolio diversification can reduce risk, and how does the efficient frontier logically fit into this discussion? include correlation, asset allocation, and asset classes or benchmarks in your answer.
- How does the creation of a portfolio reduce risk? What type of assets should be included in a diverse portfolio? Why should they be included?What is diversification? How does the risk of a diversified portfolio compare with the risks of the individual assets it contains?Is the investment risk concerned with the range of possible outcomes from aninvestment?
- Which are the different assets that have the potential to be combined efficiently in a portfolio that will provide an optimal risk-return relationship for investors?How does the diversification of an investor’s portfolio avoid risk?What statistical concept do many portfolio managers use to represent a risk when considering investment performance?
- How does the Broader Diversification Reduce Risk?How do you perceive the relationship between risk and return in the context of investment portfolios? Can you provide examples of how an investor might balance the two, and what factors influence their decision-making process in achieving an optimal risk-return profile?Critically discuss the effect of diversification on portfolio risk. Is there any limit of diversification?
