Gordon defines diversification as "the use of a diverse range of investments within a portfolio."
It is an investment strategy that entails holding a diverse portfolio of investments within and
asset class. It is considered one of the most important investing principles because it seeks to
maximize profits by investing in multiple regions that should react differently to changing
market conditions. Another diversification strategy intends to minimize investment risk by
gauging the impact in one asset class with gains in another. Having different asset types and
financial assets seeks to reduce dependence on a single asset or risk in a portfolio by flattening
out unsystematic risk events, which would also reduce portfolio sensitivity to market swings.
The advantages of diversifying a portfolio apply only if the securities are co - integrated, that
is, they react in different ways and frequently in opposite directions to market influences.
Expanding out into multiple investments and various types of investments, for example. The
assumption is that your portfolio will be secured if one specific asset, or group of assets, loses
money. For example, if you invest all your money into one stock, your entire funds could be
wiped out if that business fails or, in a far less severe scenario, fails to increase much if that
firm or its industry falls on hard times, but investing in different stocks spreads out the risks
even if one of the four fails. The other three grow in value, you can still make money overall.
The disadvantages of diversification are that it limits short-term gains, is time-consuming to
manage, and incurs more transaction fees and commissions.
PART B.
Stock markets and Real estate.
Stock markets, also known as equities, are ownership shares issued by publicly traded
companies. If you invest in stock markets, you can profit from equities either through a rise in
the share price or by receiving dividends. Investing in various companies can help you save
money, protect it from inflation and taxes, and maximize your financial return. There are two
types of equity investments namely common stocks and preferred stocks. Common stocks
provide capital growth, which indicates that the price of a stock can rise or fall over time.
Shareholders can choose to sell their shares at a profit if it rises. Common stocks have many
other advantages, such as liquidity, advantageous tax treatment and dividend income, which
can be a tax-efficient source of income for investors, and voting rights, which also give one the
ability to vote, implying that shareholders have some measure of control over who runs the
company. Preferred shares, on the other hand, provide a consistent income stream and higher
earnings. Dividends on preferred stock are taxed in the same way that dividends on common
stock are. The disadvantages of investing in stock markets include risk, which means that they
could lose their entire investment, Stockholders paid last, and High volatility, inability to
provide retirement income, a wide variety of options, and ownership risks.
An alternative common asset that I would add on my portfolio would real estate Assets. Real
estate investors profit from rental income, appreciation, and profits from business activities that
rely on the property. Among the advantages of investing in real estate are passive income,
consistent cash flow, tax advantages, diversification, and leverage. The best part is that you
make your decisions. Higher transaction costs, low liquidity, management and maintenance
requirements, and significant inefficiencies are some of the disadvantages of investing in real
estate assets.
Part c
Market risk occurs when the prices of financial instruments move as a result of directional and
non-directional risk. The movement of store prices, interest rates, and other variables causes
directional risk. Volatility risk is at the heart of direction risk.