Diversification in Investing (806 hits)
Category: Business & FinancialRating: 0.14 on 18 reviews (Rate this item) (V)
Submitted by PMJ <potatomanjack79.at.yahoo.com> (View user info) at 2006-06-16 09:51:46 EDT
This is for investors looking to the AUS market... seriously...
There probably aren't any here, nad honestly, if you're not an investor, you are probably gay.
Seriously though, you do need to know the BASICS of investing these days, and so I'm going to paste in the most boring piece of crap in the world just for people's information.
I am fully expecting a negative review because this IS going to be the most boring post in the history of posts...
well, not that's not true because fucking AIDS chicks with razor blade laden gauntlets is scarey.
So here's the info based on the AUS market:
Diversification involves spreading funds into multiple investments, including stocks, mutual funds, bonds, and cash accounts. The benefit of diversification is that it reduces the risk of a portfolio, while not necessarily reducing the returns. This is why diversification is referred to as the only free lunch in finance. Money can also be diversified into different mutual fund investment strategies, including growth funds, balanced funds, index funds, small cap, large cap, and sector-specific funds. Geographic diversification involves a mixture of domestic and international investments. Truly, there are an infinite different ways in which to diversify.
The level of risk reduction that diversification will have can be measured through intra-portfolio correlation. This is a statistical measurement from negative one to positive one that measures the degree to which the various assets in a portfolio can be expected to perform in a with relation to one another. A positive correlation of one would mean that the two assets perform identically while a negative correlation of one would mean a direct opposite performance of two assets..
Portfolio balance occurs as the sum of all intra-portfolio correlations approaches negative one. Diversification is thus defined as the intra-portfolio correlation or, more specifically, the weighted average intra-portfolio correlation. Minimized intra-portfolio correlation occurs when diversification has been increased to its theoretical maximum (i.e. the stage where further diversification has almost no effect on the overall portfolio risk).. Reducing intra-portfolio correlation through diversification may be an effective risk management measurement
Modern portfolio theory (MPT) proposes that rational investors can use diversification to optimize the returns and minimize the risk of their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are Markowitz's diversification, the efficient frontier, the Capital Asset Pricing Model, along with the beta coefficient, the Capital Market Line, and the Securities Market Line.
MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance. Risk in this model is identified with the standard deviation of portfolio return as a percentage base on price. Rationality is modeled by supposing that an investor choosing between several portfolios with identical expected returns will prefer that portfolio which minimizes risk.
In comparing the risk and return of investing in Westfarmers (individual stock) vs. the 20 leader fund we have found the following conclusions.
The 20 leader fund is a mix of the following stocks (tickers, all with same weight): AMC, AMP, ANZ, AWC, BHP, CBA, CML, FGL, NAB, NCP, NCPDP, RIO, SGB, TLS, WBC, WES, WFT, WOW, WPL and WSF (please see attachment 1 which displays a stock correlations matrix of all these stocks).
The 10 Leader Fund (which we created) is a mix of the following stocks (tickers, all with same weight): ANZ, AWC, BHP, RIO, SGB, WGC, WES, WOW, WPL and WSF (all of them with the same weight in the 20L Fund) (please see attachment 2 which displays a stock correlations matrix of the above stocks).
The 6 Leader Fund (also created by us) is a mix of the following stocks (tickers, all with same weight): BHP, NCP, NCPDP, SGB, TLS and WES (please see attachment 2 which displays a stock correlations matrix of the above stocks).
The correlations between these funds are as follows:
Using this infomration, we can conclude that investing only in one stock is more risky than to diversify in a group of stocks, but can have higher returns. In this example, we can see that investing only in Westfarmers is riskier than investing in the 20L fund, but return is higher, as would be expected considering the higher risk involved.
If we take the 10 best stock, labeled the 10 Leader Fund, we can almost double the return obtain by the 20 Leader Fund, with only adding a little bit more risk. Depending on a customer's risk tolerance, he/she could choose which index best fits with his/her investment preferences.
However, if we choose to invest in a 6 Leader fund, we are going to get a similar return than the 20 Leader Fund, 8.95 % annually vs. 9.93% annually respectively. However, the risk is much higher in the 6 Leader Fund 3.76% vs. 2.21% from the 20 Leader Fund. Finally, if we calculate the correlation between them, we see a result of 0.85, which is quite high. In this case we believe that the increased risk involved outweighs the possible premium return.
In summation, the ideal portfolio combines the greatest return, and the lowest risk (standard deviation). In order to achieve this, stocks with high returns and low correlation (the closer the total to zero, the better) are essential. However, at the end of the day, it is the investors risk tolerance that will decide which investment he/she is willing to purchase.
User Reviews
Submitted by Axolotl (user info) at 2006-07-08 19:36:02 EDT (#)
Ranking: -2
This affects me in many meaningful ways.
Submitted by Paul_Monroe (user info) at 2006-06-17 01:43:32 EDT (#)
Ranking: 0
buffet doesn't bel;eive in diversifying. if you really want to know what to do in the aussie market email itspaulmonroe@gmail
Submitted by resignator (user info) at 2006-06-16 16:25:37 EDT (#)
Ranking: 0
Submitted by ConorJS (user info) at 2006-06-16 16:11:55 (#)
Ranking: 0
All I can think of is the SNL fake ad with the Wutang Clan Investors Group.
"Yo, you need to diversify yo' shit."
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That was Dave Chappel not SNL.
Submitted by ConorJS (user info) at 2006-06-16 16:11:55 EDT (#)
Ranking: 0
All I can think of is the SNL fake ad with the Wutang Clan Investors Group.
"Yo, you need to diversify yo' shit."
Submitted by JonnyX (user info) at 2006-06-16 15:50:12 EDT (#)
Ranking: 2
PMJ!
I have genuinely missed you, ol' buddy.
I hope you get to hang around more...
Submitted by ess-arr (user info) at 2006-06-16 11:50:30 EDT (#)
Ranking: 2
nice seeing you on my last day, peace bro.
Submitted by dove666 (user info) at 2006-06-16 11:11:12 EDT (#)
Ranking: -1
Wow. If there's a quiz I'm fucked!
Submitted by gank (user info) at 2006-06-16 10:36:09 EDT (#)
Ranking: 1
Exposed, if you're as serious as this, then why the hell did you take over the account of a shitty alter. You should've just made your own account.
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Submitted by exposed (user info) at 2006-06-16 10:21:16 EDT (#)
Ranking: 1
This is a decent proposal. In todays markets one needs to definately look into the international sectors. I am not too versed on AUS as a hotbed for economic growth. I do know that we are focusing a great deal on BRIC (Brazil, Russia, India, China). The geographical regions are attractive for multiple reasons. They have inexpensive labor, cost of living is lower, people work harder, and people are becoming rapidly more intelligent in these places as well. It is a fact that more than half (54%) of the worlds largest companies now reside outside of the US. Many of these companies were once central in the US but have moved abound due to the factors listed above.
Todays markets are tricky. You can see come success in some mutual funds today. Some of those that we are kicking ourselves about include Pru's Natural Resources Fund (67% 1yr & 17% ytd) amoung some others. I have been seeing success in long term markets when picking up high dividend paying stocks. These companies need to be the benchmark in their industry and include names like Caterpillar & Starbucks. These stocks have great track records, but I do agree in diversifying your portfolios into mutual funds. Steady, long term growth is more attractive than ups and downs and the ever present ability to crash of one stock pick. I like what you wrote. I will have to look into the AUS market more fully. For now, I know BRIC is a beacon of growth for years to come.
Submitted by potatomanjack (user info) at 2006-06-16 10:08:43 EDT (#)
Ranking: -2
Hey!!!!
At least the spacing is bad.
Submitted by redskieslookfake (user info) at 2006-06-16 10:07:58 EDT (#)
Ranking: -2
mmmm finance
-2 die
Submitted by Shlongy (user info) at 2006-06-16 10:01:59 EDT (#)
Ranking: -2
I ALWAYS love that Chevy Chase/Gerald Ford line...
Submitted by DCWoody (user info) at 2006-06-16 09:59:28 EDT (#)
Ranking: 0
MEh, thats what SPT was originally for I suppose.
Submitted by badassmofo (user info) at 2006-06-16 09:58:47 EDT (#)
Ranking: 0
I was told there would be no math.
Submitted by potatomanjack (user info) at 2006-06-16 09:56:48 EDT (#)
Ranking: -2
This post has no value to anyone.
I know that, and am just posting because I'm so fucking tired of writing the shit that I need gratification in some fucking sense of the word.
Holy shit I'm gay...
well... not literaly.
FUCK HAPPY!
Submitted by Caulaincourt (user info) at 2006-06-16 09:54:46 EDT (#)
Ranking: 1
hello fellow montrealer :-)
Submitted by Teephphah (user info) at 2006-06-16 09:54:38 EDT (#)
Ranking: 2
TV Announcer:
The following is a public service announcement: Excessive
alcohol consumption can cause liver damage and cancer of the
rectum.
Homer: Mmm ... beer.
So It's Come To This: A Simpsons Clip Show
Submitted by Shlongy (user info) at 2006-06-16 09:53:58 EDT (#)
Ranking: -2
And this post in THIS forum impacts, let's see...no one?
Unless you think that Zitboy fuckface has some cash to invest.