Reduction of Risk through Diversification of Securities The process of combining securities in an investment portfolio is known as diversification. The aim of diversification of securities is to reduce total risk without sacrificing portfolio return. To understand the mechanism and power of diversification, it is necessary to consider the impact of co-variance or correlation on portfolio risk more closely. We shall examine three cases: (1) when security returns are perfectly positively correlated, (2) when security returns are perfectly negatively correlated and (3) when security returns are not correlated. Diversification means, investment of funds in more than one risky asset with the basic objective of risk reduction. The lay man can make good returns on his investment by making use of technique of diversification. Main forms of Diversification of Securities Simple Diversification, Over Diversification, Efficient Diversification. 1. Simple Diversification It involves a random selection of portfolio construction. The common man could Continue reading
Portfolio Management
Security Analysis Phase in Investement Portfolio Management
Security Analysis in Portfolio Management There are different types of securities are available to an investor for investment. In Indian stock exchanges shares of more than 7000 companies are listed. Traditionally, the securities were classified into ownership such as equity shares, preference shares, and debt as a debenture bonds etc. Recently companies to raise funds for their projects are issuing a number of new securities with innovative feature. Convertible debenture, discount bonds, Zero coupon bonds, Flexi bond, floating rate bond, etc. are some of these new securities. From these huge group of securities the investors has to choose those securities, which he considers worthwhile to be included in his investment portfolio. So for this detailed security analysis is most important. The aim of the security analysis in portfolio management is to find out intrinsic value of a security. The basic value is also called as the real value of a Continue reading
Portfolio Analysis in Investment Portfolio Management
The main aim of portfolio analysis in investment portfolio management is to give a caution direction to the risk and return of an investor on portfolio. Individual securities have risk return characteristics of their own. Therefore, portfolio analysis indicates the future risk and return in holding of different individual instruments. The portfolio analysis has been highly successful in tracing the efficient portfolio. Portfolio analysis considers the determination of future risk and return in holding various blends of individual securities. An investor can sometime reduce portfolio risk by adding another security with greater individual risk than any other security in the portfolio. Portfolio analysis is mainly depending on Risk and Return of the portfolio. The expected return of a portfolio should depend on the expected return of each of the security contained in the portfolio. The amount invested in each security is most important. The portfolio’s expected holding period value relative Continue reading