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    Diversification Investment Portfolios

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    we assumed that you have $100,000 in your bank account that can be invested. Suppose you invested your $100,000 in the shares of the Nike Inc. (NKE) (http://www.nikebiz.com/; http://money.cnn.com/quote/quote.html?symb=NKE). Based on your current situation, your portfolio cannot be considered a "diversified portfolio" because you invested all your money in the shares of the Tiffany & Company. In fact, undiversified portfolio is very risky and you may end up losing your investment. Therefore, it is strongly recommended that you diversify your investment portfolio by adding different types of securities.

    Read the information in the background material, look for more information, and then write a 2 to 3 page paper answering the following questions:

    How important is it for you to diversify your investment portfolio?

    How would you diversify your investment portfolio?

    Explain your reasoning

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    Solution Preview



    Diversifying investment portfolio is a technique where investments are invested in various financial instruments, companies or even industries in order to maximize returns while minimizing risks of an investment having an investment of $100,000 invested only in Nike shares makes the investment undiversified and very risky as the chances that all the $100,000 will be lost are very high. This paper analyzes why and how it is important to diversify investment portfolio and how this can be done.

    How important it is to diversity investment portfolio:

    As noted above an investment portfolio that is not diversified faces a high risk since in every company, industry or financial instrument, there are unsystematic risks that are specific to these financial instruments, industries or companies which can be eliminated or reduce through diversifying the investment portfolio. By diversifying investment portfolio one is able to allocate and spread the invested capital across a wide range of asset classes and in this sense be able to minimize risks in cases where one asset class or market performs poorly or goes under water. The more diversified the portfolio is, the less risky it is, even though at time the more less returns it can bring. Diversifying investments also rises the potential that one will have long term higher returns on their ...

    Solution Summary

    Diversification investment portfolios are examined. How diversifies your investment portfolio is determined.