Portfolio Diversification Essay Example | Topics and Well Written Essays - 2000 words

Portfolio Diversification - Essay Example client of Bill Guru’s and was â€Å"very happy† with Bill’s advice and professionalism, in helping here rebalance and reallocate her portfolio that resulted in its increasing value over the years without much volatility. Bill wanted to diversify her portfolio and reduce its beta, thereby minimising the risk inherent in her portfolio. The case presumes that the individual betas of the 5 stocks are greater than the market index beta of 1. It is the task of Bill Guru to explain to Mrs. Jones what diversification meant and what the advantages were of having a diversified portfolio. He also needed to explain why at her stage in life she would need her portfolio to be rebalanced and her assets reallocated to meet her needs both for capital appreciation and for steady income. At the same time, Bill would have to discuss with Mrs. Jones the possibility of putting part or all of her assets in other forms of investments such as money market funds or fixed income securities such as Treasury bills or Treasury bonds. The possibility of transferring all of her investments to fixed income securities would preclude the question of a beta coefficient as the latter applies only to stocks in relation to the main market index such as the FTSE. On the other hand, if a significant part of her assets continues to be invested in stocks, the beta would be a relevant concept. He will need to explain the impact of the overall market on her stock portfolio as the market is subject to systematic risks. Also he has to explain that there are factors that affect a particular stock and a particular industry, factors that are unique or specific to the stock in question. The rebalancing of Mrs. Jones’ portfolio may take any form that is tailored to the particular situation and needs. Some kind of distribution among different types of securities would have to be discussed with her that would take into account the need for steady income in the form of interest and dividends as well as