Diversification Risk and Capital Investment (Coursework Sample)
the paper contained two parts. the first part was a portfolio construction using data on five stocks traded on nasdaq. i was tasked to allocate percentages to the stocks and calculate the beta (measure of risk of the portfolio). the secon part was to explain capital budgeting and some techniques employed by business to allocate their capital.
APA FORMATING WITH DOUBLE SPACING
Diversification Risk and Capital investment Essay
Part 1
An investment portfolio is a collection of financial investments such as bonds, stocks, mutual funds, exchange traded funds and real estate. An investor who constructs a portfolio chooses which asset classes to include in the portfolio based on the investor’s objectives. The modern portfolio theory (MPT) developed by Markowitz (1952) serves as a guide in portfolio construction. Correlation between assets assumption is a central theme in the Modern Portfolio Theory. To diversify, the portfolio should not have assets that are highly correlated. The higher the correlation between the assets, there is a higher risk of the portfolio going down when an asset is hit by some crises. For instance, a portfolio that consist of only stocks of companies in the financial sector will be greatly affected if there is a crisis in the financial sector. To minimize this risk, a portfolio should be diversified by sector, company, geographical location, size and so on to maximize the return and minimize risk of the portfolio. Investors tend to choose the portfolio which is less risky when presented with portfolios that have the same expected return. An investor does not only consider the return of the individual assets but also the risk of investing in the portfolio. I construct my portfolio by picking 5 stocks traded on the NASDAQ. The stocks will have equal weights in the portfolio, hence each stock will have 20% of the portfolio.
My portfolio:
Name
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