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  • Digg it UP - Diversification and Correlation in Investments

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    . However, the reverse is also true, that the stellar performance of any one investment would not reap you amazing returns.

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    Investment Advisers often repeat this line - always diversify your investments. This is also the common wisdom repeated by the finance textbooks during your college years.

    So how do we construct an investment portfolio and what does the above really mean?

    Some have attempted to put it simply, going back to historical guidance of not putting all your eggs in one basket; conventional wisdom states that if you were to buy a variety of investments, then the failure of one would not cause your entire portfolio to collapse. However, the reverse is also true, that the stellar performance of any one investment would not reap you amazing returns.

    The

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    ce textbooks during your college years.

    So how do we construct an investment portfolio and what does the above really mean?

    Some have attempted to put it simply, going back to historical guidance of not putting all your eggs in one basket; conventional wisdom states that if you were to buy a variety of investments, then the failure of one would not cause your entire portfolio to collapse. However, the reverse is also true, that the stellar performance of any one investment would not reap you amazing returns.

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    p>Some have attempted to put it simply, going back to historical guidance of not putting all your eggs in one basket; conventional wisdom states that if you were to buy a variety of investments, then the failure of one would not cause your entire portfolio to collapse. However, the reverse is also true, that the stellar performance of any one investment would not reap you amazing returns.

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    dom states that if you were to buy a variety of investments, then the failure of one would not cause your entire portfolio to collapse. However, the reverse is also true, that the stellar performance of any one investment would not reap you amazing returns.

    Th

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    . However, the reverse is also true, that the stellar performance of any one investment would not reap you amazing returns.

    The construction of a diversified portfolio builds on the above, but on slightly more technical aspects. Firstly, one should diversify amongst the different asset classes; investors commonly select equities, bonds, cash and some alternative investments such as hedge funds, property or commodities.

    These asset classes are chosen, as their returns have historically not been correlated to one another. What this means for example is that when equities make positive returns, it has been shown that bonds make neutral or negative r

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