This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.
1. Explain the primary goal of portfolio diversification as it relates to asset allocation and correlation.
The primary goal of portfolio diversification is to lower the total risk of a portfolio without sacrificing expected return. The lower the correlation among the returns of securities within a portfolio, the better this goal is met. Individual securities tend to be more correlated with other securities within its asset class and less correlated with individual securities in other asset classes. For example, stocks tend to be highly positively correlated with other stocks, bonds tend to be highly positively correlated with other bonds (and inversely with interest rates), yet stock and bond returns are less positively correlated with each other. Therefore, a portfolio will be more broadly diversified across several asset classes than if it is comprised of securities within one or fewer asset classes....
This is only a preview of the solution. Please use the purchase button to see the entire solution