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Class Notes 4

Diversification mitigates unsystematic risk by incorporating various assets, while systematic risk remains unaffected. Modern Portfolio Theory (MPT) highlights the efficient frontier for optimizing returns relative to risk. A practical application shows that mixing stocks and bonds in a portfolio reduces overall risk compared to investing in a single asset class.

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9 views2 pages

Class Notes 4

Diversification mitigates unsystematic risk by incorporating various assets, while systematic risk remains unaffected. Modern Portfolio Theory (MPT) highlights the efficient frontier for optimizing returns relative to risk. A practical application shows that mixing stocks and bonds in a portfolio reduces overall risk compared to investing in a single asset class.

Uploaded by

rowed92414
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Investment Class Notes - Portfolio Diversification

Diversification reduces unsystematic risk by holding a variety of assets. Systematic risk cannot be
eliminated through diversification.
Modern Portfolio Theory (MPT) introduced by Harry Markowitz emphasizes the efficient frontier,
where portfolios maximize return for a given level of risk.

Key measures: expected return, standard deviation, covariance, correlation, beta.

Practical example: Combining stocks and bonds in a portfolio lowers risk compared to investing in
one asset class only.

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