Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16)


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Portfolio Selection : Efficient Diversification of Investments

Cancel Submit. It is somewhat as if coins, about to be flipped, agreed among themselves to fall, heads or tails, exactly as the first coin falls. In this case there is perfect correlation among outcomes. The average outcome of the flips is no more certain than the outcome of a single flip. If correlation among security returns were "perfect"—if returns on all securities moved up and down together in perfect unison—diversification could do nothing to eliminate risk. The fact that security returns are highly correlated, but not perfectly correlated, implies that diversification can reduce risk but not eliminate it.

The correlation among returns is not the same for all securities.

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We generally expect the returns on a security to be more correlated with those in the same industry than those of unrelated industries. Business connections among corporations, the fact that they service the same area, a common dependence on military expenditures, building activity, or the weather can increase the tendency of particular returns to move up and down together.

Portfolio Selection Efficient Diversification of Investments

To reduce risk it is necessary to avoid a portfolio whose securities are all highly correlated with each other. One hundred securities whose returns rise and fall in near unison afford little more protection than the uncertain return of a single security. It is impossible to derive all possible conclusions concerning portfolios. A portfolio analysis must be based on criteria which serve as a guide to the important and unimportant, the relevant and irrelevant. The proper choice of criteria depends on the nature of the investor. For some investors, taxes are a prime consideration; for others, such as non-profit corporations, they are irrelevant.


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Institutional considerations, legal restrictions, relationships between portfolio returns and the cost of living may be important to one investor and not to another. For each type of investor the details of the portfolio analysis must be suitably selected. Two objectives, however, are common to all investors for which the techniques of this monograph are designed:. They want "return" to be high.


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The appropriate definition of "return" may vary from investor to investor. But, in whatever sense is appropriate, they prefer more of it to less of it. They want this return to be dependable, stable, not subject to uncertainty. No doubt there are security purchasers who prefer uncertainty, like bettors at a horse race who pay to take chances.

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The techniques in this monograph are not for such speculators. The techniques are for the investor who, other things being equal, prefers certainty to uncertainty. The portfolio with highest "likely return" is not necessarily the one with least "uncertainty of return. The portfolio with the least uncertainty may have an undesirably small "likely return.

If portfolio A has both a higher likely return and a lower uncertainty of return than portfolio B and meets the other requirements of the investor, it is clearly better than portfolio B. Portfolio B may be eliminated from consideration, since it yields less return with greater uncertainty than does another available portfolio. We refer to portfolio B as "inefficient. It cannot be said of two efficient portfolios "the first is clearly better than the second since it has a larger likely return and less uncertainty.

The proper choice among efficient portfolios depends on the willingness and ability of the investor to assume risk. If safety is of extreme importance, "likely return" must be sacrificed to decrease uncertainty. If a greater degree of uncertainty can be borne, a greater level of likely return can be obtained. An analysis of the type presented in this monograph:.

The nature and objectives of portfolio analyses may be illustrated by a small example concerned with portfolios made of one or more of nine common stocks and cash. The nine securities, listed in Figures la to li, include a utility, a railroad, a large and a small steel company, and several other manufacturing corporations. Cash is included in the analysis as a tenth "security. An actual portfolio analysis would start from a much longer list of promising securities.

(PDF) Further Analysis of Efficient Portfolios with the USER Data | John Guerard - ceitocomwongback.ml

World oil price has significant impacts on oil-related stock prices both aggregate and disaggregate levels. The directions of the impacts vary according to industry. Positive significant impacts are found in Energy and Utilities sector index and oil-directly-related stock prices.


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While negative significant impacts are determined in Finance and Securities sector index, Properties Development sector indices, Banking sector index, and Information Communication Technology sector. However, the results show unclear direction and insignificant impacts of oil price on oil-substitute stock prices. As a result, the findings confirm hypothesis that oil price have significant impacts on oil-directly-related stock prices due to their business mainly and heavily relied on oil while inconclusively prove influences of oil price on stock prices of oil-substitute business listed companies.

Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16) Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16)
Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16) Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16)
Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16) Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16)
Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16) Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16)
Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16) Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16)
Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16) Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16)
Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16) Portfolio Selection: Efficient Diversification of Investments (Cowles Foundation Monograph: No. 16)

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