Diversification and Risk - Return Optimization (1825 words)

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Summary of Money and Banking Paper:
One research paper is required in this course. The paper should contain no less than six listings in the works cited page (references).
The paper should contain each of the following elements:
1) A statement of what you intend to research
2) A hypothesis about what you think you will find in the literature regarding the topic
3) A review of the current literature on the chosen topic
4) A summation of what other authors have written or researched regarding the topic
5) Your own response detailing what you learned about the topic after researching it. For example: Were your original ideas about the topic confirmed by the research? If not, why do you think they were not?
The length of the paper should equal approximately 7 - 10 typed, double spaced pages with one-inch margins (left, right; top and bottom), and font size no larger than 12 point (No less than 1,800 words ). If you choose, the paper can be longer in length but not shorter. Please include a cover page, with the title of your paper, your name, and the date. The paper must follow the APA format.

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Introduction
Investors seek to invest their funds so that they can earn maximum return and at the same time, reduce the risk associated with those investments. However, risk and return tend to move together in the same direction and as the expected returns from the asset increases, the riskiness of the asset also increases. As such, the main aim should be to optimize the risk and return of the securities held by the investor. There are many strategies which are used to optimize risk and return. In this paper, the focus is on the use of diversification to optimize the risk and return attributes of the portfolio. Diversification is based on the adage “Do not put all your eggs in one basket”. This helps to reduce dependence on any single security or asset class. Yet, there are factors which should be analyzed before creating an efficiently diversified portfolio. This is the theme of the paper. The next section presents the research statement followed by literature review and reconciliation of findings from the subjective research.
Research statement
This research has been conducted to find whether diversification across asset classes or individual securities helps to optimize the risk and return attributes of the portfolio. Secondary research has been used in this paper in which the findings of other researchers have been used to reach a conclusion.
Hypothesis
The research is based on the hypothesis that diversification would lead to optimization of risk and return characteristics of the portfolio in all situations. The alternate hypothesis states that diversification would optimize risk and return in certain circumstances only.
Literature review
Diversification refers to the presence of many securities in the portfolio. Syllignakis...
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