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Definitions of diversification and asset allocation strategies









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发表于 2020-6-8 04:51:42 | 显示全部楼层 |阅读模式
Definitionsof diversification and asset allocation strategies
Although the assumptions of modern portfolio theory arelikely somewhat flawed, asset allocation using MPT is still a proven method toreduce volatility in an investment portfolio. A simple example using separateinvestors can help explain the value of diversification.
The previous example identifies two different types of risksassociated with investing in financial markets. The first type of risk is therisk associated with the entire market or systemic risk. Regular risk affectsall stocks in the entire market together, as a whole, and cannot be diversifiedaway within that market. For example, if the entire US economy is weakening, itwill affect all stocks within the S&P 500 to some extent. Diversifying yourportfolio with other stocks within the S&P 500 will not reduce the overallrisk in the portfolio significantly since other stocks share the same equitycharacteristics.
Another type of risk is the risk that is specificallyrelated to individual security, or irregular risks. Asymmetric risks can bediversified easily, as seen in the previous example of diversification. If oneinvested equally among the shares of thirty different companies, and one ofthose companies went completely out of business, the loss in the totalportfolio would be only 3.3%.
Finally, asset allocation as a risk management tool does notaddress the risk of portfolio withdrawal. Withdrawal is defined as the minimumvalue for an individual investment or investment portfolio reached after aprevious peak in value. During secular bears' markets, wallet withdrawals canbe significant. Simply spreading a person’s investments across multiple assetclasses may not provide adequate risk protection.
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