Please respond to each student
Student 1
What does it mean to diversify your portfolio? Explain why it is recommended.
To diversify their portfolio, one has to diversify their investments. One can diversify their portfolio by investing in a mix of stocks, bonds, cash and other types of investments. It is recommended that we diversify our portfolio to create some kind of balance. We need a strategic asset allocation plan to make sure to limit losses and make profit more likely.
What types of securities would be included in one’s portfolio? How does correlation influence one’s portfolio?
The types of securities that could be in one’s portfolio are stocks, bonds, commodities, cash, and cash equivalents and so. “Correlation is the degree of relationship between the price movements of assets included in the portfolio” (Singh, 2020). Choosing uncorrelated assets or assets that are negatively correlated. That is a way to diversify one’s portfolio. By investing on basis, we make sure that no all parts of the portfolio are going to fall at the same time. When our assets are correlated, we have a higher risk of incurring big losses.
References:
Singh, M. (2021, May 19). Protecting portfolios using Correlation Diversification. Investopedia. Retrieved from https://www.investopedia.com/articles/financial-theory/09/uncorrelated-assets-diversification.asp.
Student 2
Hello class,
What does it mean to diversify your portfolio? Explain why it is recommended.
Diversification is spreading the risk across different types of investments, the goal being to increase the odds of investment success. It’s like saying since no one can know for certain who is going to win this race, let’s bet on everyone. Diversification is important in investing because markets can be volatile and unpredictable. By diversifying your portfolio, you “reduce the consequences of a wrong forecast,”
In practical terms, diversification is holding investments which will react differently to the same market or economic event. For instance, when the economy is growing, stocks tend to outperform bonds. But when things slow down, bonds often hang on better than stocks. By holding both stocks and bonds, you reduce the chances of your portfolio taking a big hit when markets swing one way or the other.
What types of securities would be included in one’s portfolio? How does correlation influence one’s portfolio?
There are several things that investors do to protect their portfolios against risk. One significant way to protect one’s portfolio is by diversifying. In short, this means an investor opts to include various types of securities and investments from different issuers and industries. The idea here is the same as the old adage “don’t put your eggs all in one basket.” When you are invested in many areas, if one fails, the rest will ensure the portfolio as a whole remains secure. This added security can be measured in the increased profits that a diversified portfolio tends to bring in when compared to an individual investment of the same size. Diversification is a great strategy for anyone looking to reduce risk on their investment for the long term. The financial concept of asset correlation is important because the goal of asset allocation is to combine assets with low correlation. Combining asset categories that have a low correlation reduces the volatility of the portfolio as a whole and allows the portfolio manager to invest more aggressively.
References
Palmer, B. (2021, September 8). 5 tips for diversifying your portfolio. Investopedia. Retrieved November 5, 2021, from com/articles/03/072303.asp” rel=”noreferrer noopener” target=”_blank”>https://www.investopedia.com/articles/03/072303.asp (Links to an external site.).
Singh, M. (2021, May 19). Protecting portfolios using Correlation Diversification. Investopedia. Retrieved November 5, 2021, from https://www.investopedia.com/articles/financial-theory/09/uncorrelated-assets-diversification.asp (Links to an external site.).
Jark, D. (2021, September 13). Portfolio diversification done right. Investopedia. Retrieved November 5, 2021, from https://www.investopedia.com/articles/investing/030116/portfolio-diversification-done-right.asp.
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