Markowitz Diversification

In Markowitz diversification, the emphasis shifts from the number of securities to the co-variance among them. In a portfolio or assets/securities that have strong negative co-variance, it is possible to reduce the portfolio risk below the level of systematic risk, In fact, it can completely eliminate the portfolio risk, that is, reduce it to zero level in a portfolio of only two assets with perfect negative correlation between their return. As most securities have positive co-variance, an important conclusion emerging from Markowitz diversification is that with an increase in the number of securities in the portfolio, the portfolio risk approaches the level of systematic risk.

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