MULTI-ASSET DIVERSIFICATION

Multi-asset diversification

Multi-asset diversification

Introduction

Mostly in developed countries, there are four classes of assets which are: bonds, real estate, cash equivalents and common stock. The fact behind these classes of assets is related to the common characteristics of member of asset class. These characteristics could be the important economic factor affecting the value of the asset class, and posses a strong correlation with that class of assets, return and risk attributes of the assets class is same, and similar regulatory and legal framework. However, it is difficult to define alternative assets class, identifying asset class as separate or part of asset class if sometime difficult. Also, it is doubtful the asset class hedge the expected investment prospect or increasing it. Markowitz diversification explains the efficiency of the portfolio at given level of risk. This explains by investing at given level of risk in traditional asset class gives highest expected returns? It is observed in most scenarios, alternative assets are part of existing asset class, and this develops opposite view on alternative asset class. On the other hand, if the view of different classes are definitely distinguished investment strategies in a present class. In the majority of scenarios, it widens the set of investment opportunity rather than hedge. Therefore, alternative assets within an existing class of assets are just alternative investment choice (Fabozzi, 2011, pp. 30-35).

Discussion

Mostly in developed countries, there are four classes of assets which are: bonds, real estate, cash equivalents and common stock. The fact behind these classes of assets is related to the common characteristics of member of asset class. Markowitz diversification explains the efficiency of the portfolio at given level of risk. This explains by investing at given level of risk in traditional asset class gives highest expected returns? It is observed in most scenarios, alternative assets are part of existing asset class, and this develops opposite view on alternative asset class. On the other hand, if the view of different classes are definitely distinguished investment strategies in a present class. In the majority of scenarios, it widens the set of investment opportunity rather than hedge. Therefore, alternative assets within an existing class of assets are just alternative investment choice (Fabozzi, 2011, pp. 30-35).

The theory of portfolio selection, along with theory regarding pricing of capital asset gives base building block for controlling of portfolios. The main objective of portfolio selection is to develop portfolios with optimized returns parallel with acceptable risk level for individuals. Portfolio selection is done by acquiring past data and expectation of investors at an acceptable risk level of the portfolio and offers techniques to select most appropriate portfolio. This theory is also known as mean variance portfolio analysis or mean variance analysis. The theory of portfolio selection is normative theory. Normative theory can be defined as it explains the norm or standard of the behaviour which investor will follow in developing a portfolio rather than just predicting the actual behaviour. However, asset pricing theory refers to describing the likely relationship that could ...