Question

In: Finance

How can I know whether a security portfolio is well diversified/ not completely diversified by looking...

How can I know whether a security portfolio is well diversified/ not completely diversified by looking at its beta, standard deviation, value of treynor ratio and Sharpe ratio?

Solutions

Expert Solution

Security portfolio is well diversified looking at different measures such as beta , When the stock portfolio does not react much to the market volatility and it is well diversified so that it has it own risk associated with it and it is less volatile than the market.

when portfolio has lower standard deviation than that of the market and it can be said to have the portfolio is well diversified because its return are always in line with the historical mean and if not fluctuating so it can be said that the standard deviation of the portfolio is low.

Sharpe ratio is less than 1 then it does not mean that for portfolio to be well diversified, the sharpe ratio must be greater than 1, and it must not be reacting must the market volatility in order to have diversification.

When portfolio does not deviate Much as the market force continue to fluctuate and they continue to have higher than the historical averages but the portfolio does not react to those wide fluctuations and it remain low fluctuating, so according to treynors ratio such portfolio are less volatile and well diversified.


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