Question

Formulate an argument for investment diversification in an investor portfolio.

Answer 1

Diversification of investment into various asset is always advantages for portfolio management because there are various kinds of systematic as well as unsystematic risk which are associated with investment into portfolio, so when a diversification into various asset classes are done, unsystematic risk or firm specific risk are completely eliminated. Hence, diversification into various securities can help into minimising the overall firm specific risks and magnifying the overall return of the portfolio.

Systematic risks associated with an investment cannot be completely eliminated as there is always a risk for being invested into the market. Hence, since the systematic risks are not completely eliminated, diversification of the portfolio would still provide a better management in minimising the risks which are systematic in nature.

it can be advocated that diversification of portfolio is advantages because it will lead to minimization of risk and maximization of returns and it can protect against adverse economic scenarios.