FINANCE

Finance



Finance

Relationship between Risk and Rate of Return

There is a positive relationship between return and rate of risk. This means that the choice of one of the dominant values ??of higher risk can generally get a higher rate of return. It should be emphasized that, although more risky value will usually produce a higher rate of return, but sometimes it will lower income. The reason for this is shown by the investors' risk aversion. Because of this higher-risk, values ??should offer higher return to induce investors to purchase those (Ross & Westerfield, 2002). The relationship between risk and return will become apparent when we compare different categories of securities. In formulating a portfolio that will minimize risk and maximize rate of return diversification will be utilized. When investing, it is common to diversify the portfolio to minimize the risk. It is almost impossible to predict how the financial markets and leads each asset class (such as cash, bonds, property and shares) have its own economy. By diversifying the investments, an investor can take advantage of the 'ups', while the restriction on the "downs" (Hagin, 2004).

Diversification of a portfolio means investing in different asset classes and investment in a number of securities within each asset class. In the category of the content strategy, investor should hold a number of different companies as well as invest in overseas shares. These companies would also be a variety of industries, as they have their own economic situations. In the diversification strategy, even if one or two of the investments go bad, the investor will find many other investments, which will be beneficial and gain return.

Investment Diversification in an Investor Portfolio

Diversification is one of the main ways of reducing the level of risk in the investment portfolio. This strategy leads to a smooth line of capital, and thus contributes significantly in improving the long-term return on investment. Diversification has attracted high attention among the investor, globally, however, it must be remembered that it does not always give positive results. It should therefore be aware of some basic principles that are connected with the process of diversification. 

The first argument in favor of alternative investments is an opportunity to diversify an investment portfolio. Traditional tools allow you to invest to reduce risk, but in a very limited scale. For example, a gradual global growth rates yield the vast majority of them with very high probability cannot even compensate inflationary losses. Diversification allows private investors to enter in a fundamentally new market segments and achieve better diversification, especially when you consider that some segments of alternative investments are characterized by very low correlation with other investment instruments.

The diversified portfolios have higher returns and lower risk as compared to undiversified investment portfolios. The returns are also dependent on the specific industries. For even greater portfolio diversification, investors include in your portfolio not only shares of different companies, but also stocks from different industries. This reduces the risk of loss in adverse situations in a particular industry. Therefore, a diversified portfolio includes investment in different ...