Homework Answers
- A diversified portfolio consists of investments done across various financial instruments, categories and so on. The investment is not only on one financial instrument. As a result the portfolio risk is diversified with an aimfor a maximum return. A diversified portfolio has the potential of giving very high returns guarded with minimized risk. A portfolio contains stocks, bonds and other asset classes. And these asset classes wouldn't react to an event in the same way. Stock market and bond market movements are inverse to each other. So if bond market goes down, stock market would come up. For example, a negative event in stock market would drag the stocks down with the bonds going up. This way a diversified portfolio nullifies the negative impact of an event with its asset allocation.
Characteristics of a diversified portfolio:
It reduces risk by diversifying investment ascross various asset classes.
As diversified portfolio reduces risk, the returns would be assured and good but lower than the aggressive portfolio which is a high risk portfolio
Maintaining and balancing a diversified portfolio is a complicated process for investors and hence should be done by a certified expert. These funds can be expensive due to this.
Diversification can protect your portfolio against diversifiable risks. But risks like inflation, exchange rate, interest rates and so on are non-diversifiable. They are known as market risks. A diversified portfolio doesnot protect you from market risk or systematic risks. Market risks would affect whole economy and not just investments.
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NOT MULTIPLE CHOICE
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