The Critique of What Measures the Benefits of Diversification Essay example

The Critique of What Measures the Benefits of Diversification Essay example

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Introduction
The basic premise of investment would tell us that investors like return and definitely dislike risk. More often than not, people will invest in risky assets only when they expect to receive higher returns. Thus, people find it important to define precisely what the term "risk” means as it relates to investments. It is also important to examine procedures that people, more specifically financial analysts use to measure risk and to discuss the relationship between risk and return (Liang & McIntosh, 1999). As a fact, risk can be measured in different ways, and different conclusions about an asset’s riskiness can be reached depending on the measure used. Based in the work of Brigham and Houston (2009) in the book Fundamentals of Financial Management, “In the real world, where the correlations among the individual stocks are generally positive but less than +1.0, some, but not all, risk can be eliminated”. Therefore, it is somehow impossible to form completely riskless stock portfolios whose correlations were zero or negative. Investowords define diversifiable risk as, “The risk of price change due to the unique circumstances of a specific security, as opposed to the overall market”. These events are usually random thus their effects on portfolio may be eliminated through diversification, which means to say that bad events in one firm will be offset by good events in another. The authors of the paper were able to point out significant details such as providing concrete examples of these risks and ways to eliminate them. It also helped that they were able to discuss the differences of one risk to another and how it significantly affects an investment. On the contrary, although the authors provided a good discussion on thes...


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http://www.direxionfunds.com/wp-content/uploads/2012/09/Correlation_Analysis.pdf

Delcoure, N. (. (2010). Diversification benefits: Correlation and return gaps. International Review of Applied Financial Issues and Economics, 2(3), 597-607. Retrieved from http://search.proquest.com/docview/859435056?accountid=11243

Statman, M., & Scheid, J. (2007). Correlation, return gaps, and the benefits of diversification. Journal of Portfolio Management, 34(3), 132-139,10. Retrieved from http://search.proquest.com/docview/195598231?accountid=11243

International stock market correlations: A sectoral Approach: Philipp Fasnacht, Henri Louberg´e

The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Funds, : Maneet Ahuja

J. Gregory and J.P. Laurent. In the core of Correlation. RISK, 2004.

Why Have Global Correlations Increased? Jeremy Glaser, the morning star uk

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