Page 21 - FINAL CFA I SLIDES JUNE 2019 DAY 11
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Session Unit 12:
39. Portfolio Management: An Overview
LOS 39.a: Describe the portfolio approach to investing., p. 102
Portfolio (approach) perspective -taking a holistic view by combining assets with negative risk-
return correlation characteristics can reduce/diversify overall portfolio risk whilst not reducing
overall portfolio return. Diversification ratio captured this benefit!
Diversification ratio -risk of an equally weighted portfolio of n securities (say 18%) to the
tanties
risk of a single security selected at random from the n securities (say 25%).
Portfolio Diversification ratio is 18 / 25 = 0.72 (the greater the ratio, the larger the benefit)
Works best when financial markets are operating normally. During periods of financial crisis,
correlations tend to increase, which reduces the benefits of diversification.
