DIVERSIFICATION IN STOCK PORTFOLIOS

Diversification in Stock Portfolios



Diversification in Stock Portfolios

Diversification

Efficient Diversification is the allocation of money in different classes to reduce the risk which could be in terms of bonds, securities and other money market instruments.Mostly investors treated it as a tool of increasing the expected return. Through diversification investors can decrease the investment risk and they can earn the revenue whatever they have expected with lower level of risk.

Risk is always involved in investment, if an investor is taking risk he must be ready for loss or in other words he must not expect additional return. Investor's expectation towards return is depend upon the market on which risk is based.There are some conditions in which efficient diversification of risk is required; like if we talk about banks their ultimate objective is to maximize profit with minimum risk and increase liquidity by holding liquid assets. So for the accomplishment of their objective they usually buy different securities, bonds and other money market instruments because these are most liquidized assets.

Another condition could be sometimes through merger companies tries to diversify the risk. Like Mobil Oil Corporation, an oil company made a multibillion dollar acquisition with Marcor Corporation, a container manufacturing company to acquire Richmond Corporation which is an insurance company just for the future prospectus. The main objective of that merger was the stability of the company. Because companies feel that if any company has less earning variability, it means chances of risk would also be less.

Through diversification there are certain benefits, but there is no surety that investors can get efficient investment portfolios. Because efficient portfolios are evaluated according to expected return and the investment portfolios which provides the lowest or highest risk for a given level of risk and return. b) Relationship between the number of available securities ...