Asset allocation and diversification
To reduce the risk of their investment, investors often try to diversify
their portfolio, spreading the risk they are exposed to by investing in
different assets, sectors, or regions.$$$ $$$STOCKSSTOCKS STOCKS PROPERTYPROPERTYSTOCKS STOCKS PROPERTYSTOCKS
20%$$$BONDSBONDS
40%BONBON BONDSCASH
20%Alternative assets
Hedge fund A collective
fund investing in complex
investments.Wine An investment in
wine in a warehouse or
via a wine fund.Art The collection of
work by emerging and
established artists.Stamps The buying
and selling of rare or
collectable stamps.Crowdfunding
Investment in projects
with other individuals.$$$$ $ $$ $$$$Investments
MARKET
CAPITALIZATIONThe total value of a company—its
market capitalization—is equal to
the total number of its shares
multiplied by the price of one of
those shares. For example, if a
company had 100 shares and one
share in that company was worth
$50, its market capitalization would
be $5,000 (100 x $50).
The investment industry refers to
the size of market capitalization
when it talks about large- (or “blue
chip”), medium- and small-cap
companies. Large caps are usually
more stable but offer limited
growth opportunities. Medium
and small caps can be riskier,
but can grow quickly.Strategic asset
allocation
A defensive investor may choose to
use strategic asset allocation. This
involves investing in a combination
of assets, taking into account the
expected returns for each asset class,
and therefore the overall expected
return of the investment. In the
illustration on the right, the expected
returns of stocks are 10 percent, so
by allocating 20 percent of the
portfolio to stocks, the investor will
expect them to contribute 2 percent
to the returns.US_188-189_Asset_allocation_diversification.indd 188 14/10/2016 13:06