| Investment Advisers often repeat this
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| | tolerance of the investor - an investor
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| line - always diversify your investments.
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| | with a higher risk tolerance can accept
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| This is also the common wisdom repeated
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| | greater volatility and hence can
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| by the finance textbooks during your
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| | incorporate a larger proportion of the
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| college years.So how do we construct an
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| | asset class with a higher volatility.
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| investment portfolio and what does the
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| | The significance of volatility in this
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| above really mean?Some have attempted to
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| | case is the fluctuation of the asset
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| put it simply, going back to historical
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| | class' returns about its mean - an asset
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| guidance of not putting all your eggs in
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| | with higher volatility can rise higher,
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| one basket; conventional wisdom states
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| | but can also suffer sharper falls.Having
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| that if you were to buy a variety of
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| | decided the proportion of different asset
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| investments, then the failure of one
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| | classes in the portfolio, the investor
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| would not cause your entire portfolio to
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| | now has to select the components of each
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| collapse. However, the reverse is also
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| | asset class. In equities, the famed
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| true, that the stellar performance of any
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| | efficient portfolio model and Capital
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| one investment would not reap you amazing
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| | Asset Pricing Model describe
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| returns.The construction of a diversified
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| | theoretically how to construct an
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| portfolio builds on the above, but on
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| | investment portfolio.In the hedge fund
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| slightly more technical aspects.
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| | world, funds of hedge funds attempt to
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| Firstly, one should diversify amongst the
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| | take advantage of the neutral
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| different asset classes; investors
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| | correlations of the various strategies to
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| commonly select equities, bonds, cash and
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| | build a diversified hedge fund portfolio.
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| some alternative investments such as
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| | An example of the composition of a fund
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| hedge funds, property or
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| | of hedge funds would be buying into a
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| commodities.These asset classes are
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| | global macro fund, managed futures, a
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| chosen, as their returns have
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| | convertible arbitrage fund and a
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| historically not been correlated to one
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| | long-short manager.The investment
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| another. What this means for example is
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| | community sells the concept of
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| that when equities make positive returns,
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| | diversification as a way to minimize risk
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| it has been shown that bonds make neutral
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| | and maximize returns. However, the devil
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| or negative returns. Asset classes with
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| | is in the details and in some cases
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| low correlation to each other are good
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| | over-diversification has shown to provide
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| choices for the diversified portfolio as
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| | the opposite result - giving the investor
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| each can perform independently of one
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| | mediocre returns when the general market
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| another. In recent years, the
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| | has given far better returns, as can
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| performance of the metals, energy and
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| | easily happen in an equities bull market.
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| soft commodities markets have shown
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| | What this means is, that the investor
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| themselves to be able to provide
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| | has to form an understanding of his or
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| formidable returns, independently of the
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| | her risk appetite in deciding the level
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| returns of existing asset classes.The
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| | of diversification and the composition of
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| proportion of each asset class in the
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| | the investment portfolio.
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| portfolio is determined by the risk
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