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    Lecture 2 - Module I - Concept of Diversification

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    Ubaid Dar
    This document discusses diversification as a tool for risk mitigation in portfolio management. It defines diversification as allocating resources across different investment alternatives to reduce the risk of losses by offsetting gains and losses. The document outlines two types of diversification - random and efficient. Efficient diversification involves careful security selection and risk-return analysis while constructing a portfolio. It also discusses six forms of efficient diversification and how diversification helps eliminate unsystematic risk but not systematic market risk. The conclusion emphasizes that diversification across securities, asset classes, markets, and time is important for portfolio management.

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    Lecture 2 - Module I - Concept of Diversification

    Uploaded by

    Ubaid Dar
    25 views8 pages
    This document discusses diversification as a tool for risk mitigation in portfolio management. It defines diversification as allocating resources across different investment alternatives to reduce the risk of losses by offsetting gains and losses. The document outlines two types of diversification - random and efficient. Efficient diversification involves careful security selection and risk-return analysis while constructing a portfolio. It also discusses six forms of efficient diversification and how diversification helps eliminate unsystematic risk but not systematic market risk. The conclusion emphasizes that diversification across securities, asset classes, markets, and time is important for portfolio management.

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    Lecture 2_Module I_Concept of Diversification (1)

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    This document discusses diversification as a tool for risk mitigation in portfolio management. It defines diversification as allocating resources across different investment alternatives to reduce the risk of losses by offsetting gains and losses. The document outlines two types of diversification - random and efficient. Efficient diversification involves careful security selection and risk-return analysis while constructing a portfolio. It also discusses six forms of efficient diversification and how diversification helps eliminate unsystematic risk but not systematic market risk. The conclusion emphasizes that diversification across securities, asset classes, markets, and time is important for portfolio management.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    25 views8 pages

    Lecture 2 - Module I - Concept of Diversification

    Uploaded by

    Ubaid Dar
    This document discusses diversification as a tool for risk mitigation in portfolio management. It defines diversification as allocating resources across different investment alternatives to reduce the risk of losses by offsetting gains and losses. The document outlines two types of diversification - random and efficient. Efficient diversification involves careful security selection and risk-return analysis while constructing a portfolio. It also discusses six forms of efficient diversification and how diversification helps eliminate unsystematic risk but not systematic market risk. The conclusion emphasizes that diversification across securities, asset classes, markets, and time is important for portfolio management.

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    You are on page 1of 8

    Portfolio Management

    Code- FIBA 315


    Module I
    Lecture- 2
    Risk Diversification
    Dr Amit Kr Sinha
    aksinha1@lko.amity.edu
    Learning Objective

    • To understand diversification
    • To analyze the relevance of diversification as a tool of risk
    mitigation

    2
    Diversification
    “Do not put all your eggs in one basket“
    Diversification is a technique of allocating
    portfolio resources or investable fund to a mix
    of different investments alternatives or
    securities .
    The ultimate goal of diversification is to
    reduce the risk of the portfolio by offsetting
    losses in one asset class with gains in
    another asset class.
    Diversification is the key to the reduction or
    mitigation of risk in a portfolio.
    Diversification may be attempted in two ways
    Random Diversification
    Efficient Diversification

    3
    Random Diversification

    • Random Selection of Securities


    • Selection of Security is on discretion of investor
    • Existence of Biasness

    4
    Efficient Diversification

    • Risk-Return Analysis
    • Carefully Selection of Securities
    • Construction of Portfolio after Security Analysis

    5
    Forms of Portfolio Diversification

    Efficient diversification has six forms of diversification that one


    should include in his/her portfolio.
    • Individual Company Diversification. ...
    • Industry Diversification. ...
    • Asset Class Diversification. ...
    • Strategy Diversification. ...
    •Geographic Diversification. ...
    •Time Diversification.

    6
    Diversification and Unsystematic
    Risk
    • Diversification is primarily used to eliminate or smooth
    unsystematic risk. Unsystematic risk is a firm-specific risk that
    affects only one company or a small group of companies.
    Therefore, when a portfolio is well-diversified, investments with a
    strong performance compensate for the negative results from
    poorly performing investments.

    • However, diversification does not usually affect the inherent, or


    systematic, risk that applies to the financial markets as a whole.

    7
    Conclusion

    “Diversify across securities, across asset classes, across


    markets – and across time.” – Charley Ellis

     Diversification is the soul of portfolio management


    Diversification helps in risk reduction
    An Investor should follow efficient diversification rather
    random

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