Khamis, Januari 28, 2010

Diversification (Finance)


From Wikipedia, the free encyclopedia

Diversification in finance is a risk management technique, related to hedging, that mixes a wide variety of investments within a portfolio. It is the spreading out of investments to reduce risks. [1]Because the fluctuations of a single security have less impact on a diverse portfolio, diversification minimizes the risk from any one investment.

Example


A simple example of diversification is the following: On a particular island the entire economy consists of two companies: one that sells umbrellas and another that sells sunscreen. If a portfolio is completely invested in the company that sells umbrellas, it will have strong performance when it rains, but poor performance when the weather is sunny.

The reverse occurs if the portfolio is only invested in the sunscreen company, the alternative investment: the portfolio will be high performance when the sun is out, but will tank when clouds roll in. To minimize the weather-dependent risk in the example portfolio, the investment should be split between the companies. With this diversified portfolio, returns are decent no matter the weather, rather than alternating between excellent and terrible.

Types of diversification


Diversification can be segmented into systemic and non-systemic diversification. Additionally diversification measurement can be categorized as both relative and holistic.

Relative diversification measurements compare the relationship of one asset to that of another asset. Traditional statistics such as regression, correlation are effective for this analysis and newer techniques such as copula's and cointegration add depth to the analysis.

For holistic analysis and measurement one can see the IPC below. In addition, measures such as asset quantity and measures of quantity equivalents work nicely to measure the non-systemic aspects of diversification.

Total diversification of a portfolio of assets can be measured by the portfolio dimensionality. Portfolio dimensionality accounts for both the systemic and non-systemic influences to the portfolio. The more dimensions to the portfolio the more the portfolio is capable of performing in a simultaneous and independent manner. The number of dimensions is also equal to the quantity of factors in the portfolio. The dimensionality measurement is currently patent pending. The inventors are Damschroder and Ladd and the patent is assigned to Gravity Investments.

Strategy

Diversification is the central tenet of asset allocation. The collective body of work called Modern Portfolio Theory is actually centered on the fact that combinations of assets with varying correlations can combine to form less volatile and less risky portfolios.



There are strategies used in improving diversification:
  1. Spread the portfolio among multiple investment vehicles, such as stocks, mutual funds, bonds, and cash.
  2. Vary the risk in the securities. A portfolio can also be diversified into different mutual fund investment strategies, including growth funds, balanced funds, index funds, small cap, and large cap funds. When a portfolio includes investments with varied risk levels, large losses in one area are offset by other areas.
  3. Vary your securities by industry, or by geography. This will minimize the impact of industry- or location-specific risks. The example portfolio above was diversified by investing in both umbrellas and sunscreen. Another practical application of this kind of diversification is mixing investments between domestic and international funds. By choosing funds in many countries, events within any one country's economy have less effect on the overall portfolio.
  4. Vary the investment managers and strategies used by those managers.
Diversification reduces the risk of a portfolio, and consequently it can reduce the returns. However, since diversification reduces the risk of an entire portfolio being diminished by a single investment's loss, it is referred to as "the only free lunch in finance."[2] Statistical analysis shows that there may be some validity to this claim.[3]

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Bayangkanlah segala pelaburan anda dalam bentuk sebuah banglo bernilai RM200k dilengkapi dengan hiasan dalaman yang antik dan mewah. Anda juga memiliki sebuah kereta MPV Alphard dan sebuah kereta sedan Merz C200 yang disimpan di garaj. Anda mempunyai hobi menyimpan koleksi setem dan wang kertas negara asing yang disimpan di satu ruang tersorok di dalam rumah  tersebut. 


Satu hari apabila sekembalinya anda bersama seisi keluarga dari percutian di luar negeri mendapati banglo anda telah rosak teruk dilanda tanah runtuh dan segala aset tersebut telah musnah sama sekali. Segala simpanan dari hasil titik peluh anda telah lenyap dalam sekelip mata..Anda perlu bermula dari asas kembali untuk mengecapi kemewahan yang pernah di rasai..peritkan..


Itulah kegunaannya diversify..jangan dilabur di satu tempat je..pelbagaikanlah dalam meminimakan risiko kerugian..

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