DOI: Address: Dr. Manjunatha Professor, Department of M. Published In: Volume - 12 , Issue - 4 , Year - Diversification is the process of investing in various stocks for minimizing risk or maximizing return of portfolio. The study proposes to optimise portfolio risk for rational investors and demonstrates the benefits of diversification of each stock in portfolio.
The empirical study shows that the portfolio returns are maximizing and portfolios risk is minimizing as we add more number of stocks into portfolios of the sample stocks. This shows that investors can scientifically diversify the stocks and build the efficient portfolios in the Indian capital market.
Cite this article: T. Asian Journal of Management. Author s : V. Harshitha Moulya, Abuzar Mohammadi, T. Asian Journal of Management AJM is an international, peer-reviewed journal, devoted to managerial sciences. The aim of AJM is to publish the relevant to applied management theory and practice Globalization and Indian Agriculture- General Consequences. Regional Rural Banks: A result of Narasimham committee. An Empirical model of Satisfaction, trust, and Repurchase intention in online shopping.
About Journal Contact Us. Submit Article. Manjunatha Email s : tmmanju87 gmail. Keywords: Diversification stocks return stocks risk portfolio return and portfolio risk. Recomonded Articles:. Author s : Shruthi. Venue: Journal of Investing Citations: 34 - 1 self. Citation Context Powered by:. Portfolio selection - Markowitz - A behavioral model of rational choice - Simon - Mutual fund performance - Sharpe - Mean-risk analysis with risk associated with below target returns - Fishburn - Safety first and the holding of assets - Roy - Approximating expected utility by a function of mean and variance - Levy, Markowitz - Optimal rules for ordering uncertain prospects - Bawa - The optimization of a quadratic function subject to linear constraints.
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Many bond investors are constrained by their charter to match assets to liabilities, so they have little choice but to buy low-yielding bonds. The biggest bond buyer of all is the Federal Reserve, which is completely price insensitive. You don't have to follow the convention if you don't want to, however. If you're looking to retire, low yields are a real cost to you, because now you either have to take more risk or accept lower returns. This gets you an annual expected return of 5.
The current market rightfully draws comparisons with the crazy market in late and early and the returns from buying then were 7. This means I'm currently thinking stocks will do a little better than they did if you bought at the height of the dot-com madness, but bonds will do significantly worse because so much of their returns correlate with starting yields.
This has two possible implications:. Given that the Fed is very active in the bond market but less so in stocks and that I independently modeled returns for each asset class before I thought to consider the opportunity cost, I believe 1 is much more likely than 2.
With stocks, what I do see as more likely is that there will be more volatility than normal and deeper drawdowns bear markets. I've previously written about modern portfolio theory, risk parity, and leverage for Seeking Alpha, and all of these provide some frameworks for improving your expected return without amping up risk. There are many minds on Wall Street working to maximize expected return. However, what this sometimes fails to take into account is whether everyone else is doing the same thing.
But if you do buy puts and you end up being right about the market falling, you can turn around and buy low. Not only that, but if the market does fall when you own puts, implied volatility will rise and far more investors will want to buy puts to protect their portfolio, leading to more profit. Before , puts were priced without any of this in mind, so the dealers who sold them got absolutely clobbered in the aftermath of the stock market crash.
Before he wrote the seminal book on his style of trading, The Black Swan , a young Nassim Nicholas Taleb also spotted the writing on the wall and profited millions as well from the crash. Since , market makers don't sell puts quite as cheaply as they used to, but a whole new group of capital has come into selling puts- the same group of institutional investors chasing returns.
The institutions and individuals selling these puts make an argument based on expected value that the puts are overpriced. This argument is correct, but the quants who buy them make an argument based on game theory that if the puts hit, then everything else will subsequently be underpriced.
This argument is also correct but in three dimensions instead of two. It reminds me of when daily fantasy sports were at their heyday with the million-dollar tournaments each week filled with dumb money, most players would play the Tom Bradys' and Patrick Mahomes' of the world. But to win the tournament, the quants would play the Ryan Tannehills' of the world, because if he ended up being the best quarterback of the day, they had far fewer entries to compete against.
Taleb became a professor at NYU, where one of his students, Mark Spitznagel, looked to put ideas in place that would profit from crashes. The first fund closed, but Spitznagel's second fund, Universa Investments, made headlines for eye-popping returns in the financial crisis and again in during the coronavirus crisis.
Incidentally, Universa's office is listed only a block from where I used to live in Miami- although I don't believe I ever met any of them. Spitznagel makes a lot of unique arguments in his investor letters about the state of the world-they're worth a read.
His fund made headlines again after the pension fund CalPERS redeemed their investment in his fund that would have paid off like shortly before the coronavirus crisis. What makes Spitznagel's funds different is that anyone can set up a trade profiting from a crash, but this isn't very useful if you lose more than you make overall at a portfolio level.
Universa has returned about 3. Another key argument that Universa makes is that their hedge actually allows you to take more equity risk, which provides a double benefit. But this was all theoretical for investors without access to hedge funds or a sophisticated understanding of options trading—until recently. I had laid out the theoretical basis for a similar quant fund in and to my delight, someone actually went and created one.
But Simplify's main play as an asset manager is actually tail risk hedging through its Equity Plus Downside Convexity Fund SPD , which is somewhat similar to funds like Universa, but at a fraction of the cost. Simplify made their case in that with bond yields severely depressed from the pandemic that an options-based strategy could be a complement or substitute to bonds.
Like Universa, Simplify funds aim to provide convexity to its investments, meaning that if the market crashes hard enough, the returns will actually be positive. Source: Simplify Asset Management. The put strategy is a backtest, not the performance of an actual fund, but the experience of similar funds such as Universa even after charging hedge fund fees shows that such returns are possible.
Tail hedging isn't trivial to pull off, however-and requires you to overcome a few different obstacles. Simplify's strategy requires the fund to buy deep out of the money options. If they held them to maturity, then these options would usually expire worthless when the market inevitably comes back. Simplify deals with path dependence by laddering the options over time , so that they have options expiring every quarter going out years.
Simplify also rolls the options before they expire, which saves some money. To the first point about path dependence, when the options hit, the point of the strategy is to be able to buy stocks very cheaply with money that no one else has because they all have to sell while you're free to buy.
Every "Big Short" requires you to monetize the bet at some point, and SPD is designed to monetize options in a bear market. Options generally always require you to exercise them or sell them, so to get real upside from the options they must be monetized. To the second point, you can buy pretty much anything when the market crashes and make money, so the fund is designed to rebalance and actually buy stocks if the market crashes.
This study looks at the Post-Modern Portfolio Theory that maintains greater diversification in an investment portfolio by using the alpha and the beta coefficient to measure investment performance. Don Ezra 1. Thomas H Goodwin 1. In retirement, investment portfolios must produce a stable and steady stream of distributions over an uncertain life span, and often must also fund future wealth goals, such as for gifts and … Expand.
Dynamic Asset Allocation Techniques. British Actuarial Journal. For most long-term investors, this practice results in large risks being taken that could otherwise be managed with a … Expand. Analytical Approaches to Limit Downside Risk. Sharpe … Expand. Best portfolio management strategies for synthetic and real assets. Physica A: Statistical Mechanics and its Applications.
Abstract : The modern warfighter operates in an environment that has dramatically evolved in sophistication and interconnectedness over the past half century. With each passing year, the infusion of … Expand. Risk Management Approaches in Endowment Portfolions in the s.
H e was previously the president of Newmaster Advisory Company and an associate tax attorney for the St. Stochastic Dominance: A Research Bibliography. Management Science,. Shortfall risk and the asset allocation decision. Semivariance and the Performance of Portfolios with Options. Why Investors Make the Wrong Choices. Management Approaches in Endowment Portfolios in the s. Downside Risk: Capturing What's at Stake. Sponsor-Software Systems, Inc.
modern portfolio theory and apply the mean-variance analysis to quantify Post-. Modern Portfolio Theory Comes of Age. The. Journal of. Investing. profoundly and to familiarize the investment community with the basic features of each of its phases: traditional, modern, and post-modern portfolio theory. Portfolio theory is the application of decision-making tools unde. 8, Post-modern portfolio theory comes of age - Rom, Ferguson -