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Returns follow normal distribution
- standard diviation is the risk
- mean is positive
Diversification can reduce risk.
Invest in not correlated securities
A free lunch on risk
Right assets at the right weighting - considring risk and correlation
" H.C. Andersens Konen med æggene
The more diverse portfolio - the less unsystematic risk
Risk can be measured by volatility (=Standard Deviation of the stock return over time)
Risks that affect the entire market
Unavoidable
A measure of systematic risk of a security/portfolio compared to market risk.
Market-level risk
Market risk
Non-diversifyable risk
specific to individual companies
specific to individual industry
can be avoided by diversification
Diversifyable risk
Asset-specific risk
Firm-specific risk
Idiosycratic risk
In fact the mathematical interpretation of how diversifacation is supposed to work
Among investments with the same rate of return, the one with the least risk is most desirable.
Portfolio with the highest level of return for a given risk.
More Return/Risk effective than any stock.
Note:
Historically based
Close to ideal portfolio (market portfolie)
500-ish stocks of large-cap companies
Tangent-touch-point-portfolio.
By James Tobin: