Evaluate the benefits and limitations of portfolio diversification. Discuss how risk is assessed and what methods are most appropriate for measuring systematic and unsystematic risks. What are the best ways to diversify a portfolio? Please provide your team's rationale for their opinions from this week's readings.
Please refer to the attached file for the response.
Benefits and limitations of portfolio diversification
Diversification is basically a means by which an investor reduces the overall degree of risk of his portfolio of investment. According to Mayo (2003), a diversified portfolio reduces the element of unsystematic risk (the risk that can be reduced through diversification). He further noted that by diversifying the portfolio, the investor is able to reduce the risk of loss.
The limitation of portfolio diversification is that it does not eliminate market risk or systematic risk. The justification to this is that the value of certain groups of securities tends to follow the trend in the market.
Risk may be defined as a deviation from expected outcome. ...
The expert evaluates the benefits and limitations of portfolio diversification are examined.