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Define and discuss the benefits of Diversification

Define and discuss the benefits of Diversification.  

Hello Class,

When looking at the expected rate of return, “the amount of profit or loss an investor can anticipate receiving on an investment” (Chen, Aug, 2021). An expected return is computed by multiplying possible possibilities by the probability of them occurring, then adding the results together. When dealing with expected rate of returns nothing is guaranteed. When investors create a portfolio that has multiple investments, then it is weighted average for the expected returns. When calculating expected return, the most well-known models modem portfolio theory (MPT) or the Black-Scholes model.

The required rate of return is that “return an investor thinks to receive at least, this is the least minimum return an investor wants to receive” (Cfi, 2021). The required rate is calculated using one of these models. CAPM or the Gordon growth model. The required rate can be estimated by using multiplication and addition. To calculate, multiply the beta and the current market premium and then add the risk-free rate.

Diversification is the process of spreading your risk across many different types of investments with the main purpose of increasing the investor’s chances of financial success. In terms of risk, some of the downsides of a well-diversified portfolio includes lower-than-average returns, a limited potential gain, and the chance for subpar performance if the stock selection is not rigorous.

There are advantages to having a diversified portfolio, some listed below;

  • “Minimizes the risk of loss to your portfolio “ (Hicks, Sept, 2019).
  • Show the investor more opportunities for return
  • Protect against adverse market cycles
  • Reduces the volatility

The disadvantages to having a diversified portfolio

  • Reduces quality
  • Very complicated
  • Indexing “when you have to many assets in your portfolio it becomes an index fund” (Faulkenberry, 2021).
  • Market risk
  • Below average returns
  • Lack of focus and attention to your portfolio

When doing any kind of investments there is going to be a certain level

of risk. So, in conclusion, a good and sure thing for any investor to do is to consider pursuing a more limited balance between risk and return, with the primary focus on selecting high-quality investments and determining the correct diversification measure for themselves based on their assets and risk level. Every investor knows investing is a risk and if they have done their research, they will understand the advantages and disadvantages. To include no investment is a sure winner.

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Define and discuss the benefits of Diversification

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