A Brief Note On Risk Management Through Traditional Diversification

1443 Words Dec 2nd, 2015 6 Pages
2.1 Inefficiency of risk management through traditional diversification
Risk is a probabilitic value. The notion of risk is considered as probability of happening of adverse events, and the risk can not be completely eliminated. The risk can be only reduced. In financial management elimination of the risk is meant as its maximum reduction (minimization). The portfolio, which neutralized the risk caused by a particular event, called for a balanced portfolio against the risk.
The main methods of reducing the risks associated with investments in securities based on portfolio formation are:
1) diversification of risks;
2) hedging of risks (as a special case diversification);
3) the transfer of losses to another person by means of guarantees or insurance;
4) the distribution of risks between a large number of persons ("diversification vice versa");
5) special arrangements for settlement of transactions that reduce the possibility of losses due to the increased cost and complexity technical procedures.
Tthe diversification is meant as revision of the set of securities in the portfolio in order to reduce risks. Tthis effect is achieved only when the portfolio is formed of securities, the yield of which reacts differently to the effect of the same external factors. In other words portfolio is formed of securities with uncorrelated yields, changes which partially compensate each other, and the total return on the portfolio is stabilized.
Traditional allocation strategies seek to…
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