Series 7

AAA

Portfolio Management - Diversification

Diversification
Diversification - by asset class, industry, geography and/or risk profile - benefits an investor because it means that there is always something in the portfolio that is making money, no matter what the current economic circumstances.

Bear in mind that an investment that might appear risky on its own could make perfect sense - and actually reduce risk - within a portfolio. Consider an uncovered call writer. You have already seen how he could end up losing everything if the underlying stock skyrocketed unexpectedly. But suppose the writer owned the stocks of all that company's key vendors and customers - all the firms in the marketplace whose fortunes were tied to that company. In that context - the context of a portfolio - that very bearish play could become a fairly cost-effective hedge that reduces the investor's overall risk.

Looking at the big picture, it does not matter how well one of your stock recommendations does for your client; what is important is how well that client's portfolio performs while you are managing it.

The article A Guide to Portfolio Construction delves deeper into portfolio construction by demonstrating a step-by-step approach to determining, achieving and maintaining optimal asset allocation.

Capital Asset Pricing Theory
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