Learning Material Sample
Investment and risk3.3 Risk and returns - risk reductionIn this section we consider the chief ways in which an investor can reduce risk within the investment portfolio whilst still trying to achieve its main objectives. There are two main tools used to reduce risk within an investment portfolio. These are:
Hedging Diversification. Hedging Hedging allows an investment portfolio manager to reduce risk within his portfolio of securities by using derivatives (such as futures and options) to take a counter position to the direction in which he feels that his portfolio (and by implication t... Shortened demo course. See details at foot of page. ...e there are periods of wet weather. A simple example but it demonstrates a point. This is likely to produce the most effective diversification if it can be achieved.No Correlation Returns from some companies are not related in any way to others. For example an English firm making furniture for the domestic market will not be correlated with a South African gold mining firm. The more securities that an investor holds within his portfolio and the more the returns on each investment are unc...
Shortened demo course. See details at foot of page. ...ms of risk and returns.The concept of risk reduction through diversification is illustrated by clicking here . |
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