Notes On The Value Of Diversification

The extracted data used includes monthly returns from January 1972 to July 2011. The assets are selected so that the portfolio contains the largest, most liquid, and most tradable assets. The choice of such a variety of assets across several markets was used in order to generate a large cross sectional dispersion in average return. It helped to reveal new factor exposure and define a general framework of the correlated value and momentum effects in various asset classes.

Advisors and investors would do well to pay as much attention to the expected volatility of any portfolio or investment as they do to anticipated returns. Moreover, all things being equal, a new investment should only be added to a portfolio when it either reduces the expected risk for a targeted level of returns, or when it boosts expected portfolio returns without adding additional risk, as measured by the expected standard deviation of those returns. Lesson 2: Don’t assume bonds or international stocks offer adequate portfolio diversification. As the world’s financial markets become more closely correlated, bonds and foreign stocks may not provide adequate portfolio diversification. Instead, advisors may want to recommend that suitable investors add modest exposure to nontraditional investments such as hedge funds, private equity and real assets. Such exposure may bolster portfolio returns, while reducing overall risk, depending on how it is structured. Lesson 3: Be disciplined in adhering to asset allocation targets. The long-term benefits of portfolio diversification will only be realized if investors are disciplined in adhering to asset allocation guidelines. For this reason, it is recommended that advisors regularly revisit portfolio allocations and rebalance

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

The goal of this case is to help Sandra Meyer develop a presentation to address Henry Bosse’s concerns about international investments. The general idea is to demonstrate to Henry the benefits of international diversification, if any. To achieve this goal, you need to have a view on 1) the impact of foreign exchange (FX) rates on the return and risk of international investments, and 2) the impact of having more assets on the return and risk of the investment portfolio To form views on these two points, answer the following questions: I. The impact of FX rates on the risk and return of foreign investments 1a) Using data in Appendix A, calculate the

Pension portfolio is a common asset pool meant to generate stable growth over the long run, pension funds are provide for employees when they reach to an end of their working years and retirement. (Investspodia US, pension fund 2014) Base on the case study, TMP is currently investing only in the U.S security market which is also investing domestically. Due to an increasing demand from its institutional clients for information and assistance related to international investments, the firm has decided to invest on the international market. The reason on adding international securities to the portfolio mainly it has a few advantages and disadvantages. The advantages on investing on international securities are diversification. By

In this increasingly globalising and volatile financial markets, the import of portfolio diversification in investment planning cannot be overemphasised. We all know the old adage that says: “do not put all your eggs in one basket”.

For somebody who wants to buy bonds at the moment, it is important for them to know that diversification in business is one of the ways of reducing investment risks. It is

The diversification strategy for Abercrombie and Fitch has been unsuccessful in past years. Some just don’t get it and some never will. That is how some in the corporate world looked at Abercrombie and Fitch. A&F has on several occasions been sued for their lack of diversity within their organizations in the area of discrimination. The first lawsuit in 2001 came about when A&F failed to hire minorities and women to work during the daytime in their stores. Those who were hired that were women and minorities worked the nightshift which consisted of cleaning the building and were told by store employees to never come to A&F until after the store was closed. After a thorough investigation conducted by the Los Angeles District Office of the Equal Employment Opportunity Commission (EEOC), A&F was found to have thrown away applications that should have been kept on hand for at least a year or more to cover up their hiring practices. (Esemplane, 2008) Another subtle hint of discrimination was that store employees were to only approach those shoppers who fit the A&F image. The image of A&F is one who is blonde hair and blue eyed. (Carando, 2007)

Internationally, the flow of capital across national borders and into markets once believed to be impregnable is occurring at the speed of light. Technological innovation, accessibility to international market economies, and increased globalization has expanded the universe of securities available for investments and more importantly portfolio diversification. The developments mentioned above questions traditionally accepted principles by investors who believed that investing solely in U.S. securities would result in a better risk-return tradeoff. Prudent investors have known that diversifying across industries and markets will lead to a given level of expected return at a significantly lower level of risk, and vice versa. However, the advantages of such diversification are limited due to the same cyclical economic fluctuations that all assets (or companies) in a particular country are exposed to.

What is diversification? According to the Merriam-Webster Dictionary online, diversifications means to produce variety or to engage in varied operations. Diversification is a strategy that takes companies into new markets with new products and services to increase their profitability. Some corporations have diversified and succeeded, while other have tried but failed. Today Sara Lee Corporation is a global manufacturer and marketer of brand-name products for consumers globally focused primarily on the meats, bakery, beverage and household products categories.

….the optimal number of funds of hedge funds to effectively benefit from diversification. Using the Altvest database, we provide evidence that from a pure market risk perspective, existing funds of hedge funds are sufficiently well diversified.

Let’s explain diversification of a company first; I myself thought it meant something totally different. A diversified company is a company that has multiple unrelated businesses. Those different businesses require separate management teams, have different customers, and produce different products or sell different services. One of the advantages of being a diversified company is that can create a separation from issues of one of the other businesses.

In addition, Clarkson (1995) argues that some of corporate responsibilities to stakeholders are also related to social concern from society’s perspective. Furthermore, Brammer et al. (2006) state CSP has become principal component of business organization performance since a firm undertaking intense pressure from stakeholders, such as customers, employees, and socially responsible investors, to show their commitment and contribution to society in social and environmental issue. Hence, we may argue that CSP is a performance measurement which reflects firm’s response toward stakeholder demands and social issues that relates to long term performance.

This risk can become less pronounced through investor education, the increased availability of information through the internet, and more consistent and rigorous accounting standards. Foreign regulations and taxes can be expensive and difficult to negotiate for even experience, professional portfolio managers. Currency risk is also a major factor in the decision to diversify overseas. Unhedged currency movements can easily destroy any profits from even the most successful investment. Though hedging may be an option for large investment banks and corporations, the individual investor does not have access to the same financial instruments or low transactions costs. The only option may be to remain unhedged or to find local instruments that are able to offer diversification benefits while removing some of these issues.

Traditional portfolio construction approaches, which focus on asset class diversification, may fall short of investors’ goals. A more efficient diversification strategy may be to allocate across the underlying “risk factors.”