How Diversification leads to reduction in unique risk, and averaging in market risk.

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Information about How Diversification leads to reduction in unique risk, and averaging in...

Published on June 13, 2016

Author: sultanislam

Source: slideshare.net

1. Welcome to Our Presentation

2. Md. Ridwan Reza Senior Lecturer Department of Business Administration Leading university, Sylhet Prepared for

3. Sultan Islam- 1201010182 Syed Aminur Rahman- 1201010331 Md.Shahriar Chowdhury- 1201010136 Masuda Akther Jagirder - 1201010044 Rafiqul Bari Rahad - 1201010145 Prepared By

4. Diversification  Principle of Diversification “when securities are combined into a portfolio, the resulting portfolio will have a lower level of risk than a simple average of the risks of the securities.” Simply diversification means you don't put all your eggs in one basket. Diversification is a way to try to reduce the risk of your portfolio by choosing a mix of investments

5. Why do Investors Construct Portfolios ? To reduce risk Portfolio risk depends on the covariance or correlation coefficient between two securities. low correlated securities reduce portfolio risk significantly If r = -1, portfolio risk reduces nearly zero

6. Market Model The return of any security The total risk of securities by taking variance: Portfolio Return By substituting ri

7. The total risk of portfolio by taking variance: Note that, assumed to be uncorrelated. Thus,

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