Microsoft PowerPoint - PoF.ppt

Properties of portfolios: diversificationƒ 29

Diversification:

strategy designed to reduce risk by

spreading the portfolio across many assets

ƒ

Unique risk / unsystematic ri

sk / diversifiable risk /

idiosyncratic risk:

risk factors affecting only that firm

ƒ

Market risk / systematic risk:

economy-wide sources of risk that

affect the overall stock market

Single-period random cash flows: Mean-variance portfolio theory

0

(^51015) Number of Securities
Portfolio standard deviation
Market risk
Uniquerisk