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Essay / Research Paper Abstract
This 5 page paper examines the concept of diversification in portfolio investments, what it is, how it can be used, the benefits and the limitation. The paper looks at a range of theories including industry and international diversification. The bibliography cites 10 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TEdvsfcatn.rtf
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Unformatted sample text from the term paper:
level, as, where one share is invested in and it increases there will be the gain on 100% of the portfolio, but at the same time, if the share falls,
there will also be the proportional fall to the entire portfolio. If there is more than one investment in the portfolio, and they are different types of investments or are
in different markets, it is unlikely that both investments will suffer the same fall at the same time, this exposure to risk has been reduced, If this is combined into
a portfolio with many investments, the fall of any one share will have a much smaller impact on the portfolio as a whole.
If we look at many of the model models that have been developed they consider the role of different types of risk, for example, Capitals Asset Pricing Model (CAPM)
looks at the way in which specific risk is reflected in a chare price, but does not allow for market risk as this impacts on all shares. Efficient market hypothesis
(EMH) looks at the way that knowledge of the company exists and to what degree there is an asymmetry that can be used to assess the specific risk of a
company. Diversification is meant to lessen the impact of these specific risks. However, not all exposure to risk as be diversified away and to understand the concept of diversification we
need to look at diversification and risk in greater detail. The principle of diversification looks at two kinds of risk; systematic
and specific risk (Howells and Bain, 2003). Specific risk is that which is not easily diversified away. These are the risks that impact on a single company or sector, such
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