I am hoping to end up with a simple number such as "80 basis points". Of course, if that is not possible then we will take whatever answer is the truth.
2006-06-20 08:03:43 · 4 answers · asked by steven B 1 in Business & Finance ➔ Investing
There is no value added by diversification (all things being equal). You are trying to reduce your risk.
2006-06-20 08:10:02 · answer #1 · answered by dredude52 6 · 0⤊ 0⤋
The Sharpe Ratio can do what you want. The Sharpe Ratio is equal to the expected excess return divided by the standard deviation.
The expected excess return of the portfolio is simply the expected return minus the risk free rate.
The Sharpe Ratio measures the return per unit of risk of your investment. If you were to put together a portfolio of several stocks with the same expected return, the excess return of the portfolio would be the same -- but because of diversification the risk level would go way down. Therefore, the return per unit of risk would be higher.
2006-06-20 08:40:42 · answer #2 · answered by Ranto 7 · 0⤊ 0⤋
Diversifying does not increase or decrease the value of a portfolio, it merely reduces the risk and extent of wild fluctuations in its value. You get greater safety at no extra cost. Well worth having.
2006-06-20 11:32:11 · answer #3 · answered by Anonymous · 0⤊ 0⤋
You have to identify the risk, or beta, for any given stock you hold. If you were to trade that stock for another, you subtract one beta from the other, and there's your quantified answer.
2006-06-20 08:06:34 · answer #4 · answered by ? 6 · 0⤊ 0⤋