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Essay / Research Paper Abstract
This 5 page paper considers to what extent the traditional approach of portfolio diversification is valid and useful in today’s complex international investing environment. The paper looks at research that has been conducted and the ways in which different risk that diversification should minimize are evidenced. The bibliography cites 12 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TEdiverse.rtf
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Unformatted sample text from the term paper:
order to minimise specific risk is not new and has been applied to both national and international markets. The application of this principle to international markets in the past has
been seen in many studies such as Solnik (1970 quoted in Campa and Fernandes, 2004) and Grubel (1968). The correlation has been see and demonstrated, but there has
been disagreement concerning the reasoning behind the found correlation and as we move forward the evidence that supports the principles of international portfolio diversification begin to loose some of their
pursuance as the results become less conclusive (Hany, 1997). The research does not rule out the value of diversification, but the benefits may not be as great as expected or
realised as expected (Hany, 1997). The principle of diversification looks at two kinds of risk; the systematic and specific risk. Specific risk is
that which is not easily diversified away. These are the risks that impact on a single company or sector, such as changes in company management or particular events, such as
strikes. These are risks that can be reduced or eliminated where a diversified portfolio is held, as the risk is spread to such a degree that it should not, as
a single factor, impact on the overall value of the investment. Systematic risk is risk that is more difficult to avoid and
will impact on all companies. Such as the economic growth of an economy, interest rates and inflation, unemployment levels and the foreign trade relationships. The traditional view is that these
are risks that cannot be diversified, as they will impact on all companies. However, we can argue some diversification is possible using
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