PORTFOLIO DIVERSIFICATION: ROLE OF CORRELATION IN SETTING DIVERSIFICATION STRATEGY
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Abstract
Through the entire portfolio construction process, it is vital to reduce exposure to risk by combining a variety of investments so to make balances between the risk and return of various types of investment. Diversification is not only alive and well; it is the best way to smooth out unsystematic risk events. The phrase “diversification” is thrown around quite often when it comes to investing. The only way to achieve real diversification is by investing in different asset classes with low correlation to each other. This paper focuses to statistically analyze the investment decisions involved in constructing a diversified portfolio with special consideration of broad assets allocation strategy (diversification). We here will statistically discuss the importance of correlation in diversification and also throw some light on alternative investment as a risk reduction technique. We also explore the stock market data to analyze the paper.
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