What is the main purpose of diversification-02336
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vu mth718 Topics in Numerical Methods.
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vu mth718 Mid Term Solved Past Paper No. 5.
Diversification
The insurance principle illustrates the concept of attempting to diversify the riskinvolved in a portfolio of assets (or liabilities). In fact, diversification is the key tothe management of portfolio risk, because it allows investors; significantly tolower portfolio risk without adversely affecting return. The purpose of diversification is to allow the companyto enter lines of business that are different from current operations. When the newventure is strategically related to the existing lines of business it is called concentric diversification. The main purpose of diversification is to lessen risk. For example, if someone has 20 percent of her portfolio invested in XYZ stock, she stands to lose a significant percentage of her portfolio value if XYZ declines. However, if the investor diversifies by investing in other stocks and leaves only 5 percent of her portfolio in XYZ, she will lose a much smaller percentage of portfolio value in the event of a decline
