The Pros And Cons Of Portfolio Theory

3. Investment is inherently risky; however, the wise investor will seek ways to reduce this risk. One such method is to utilize portfolio theory when planning the investments. Explain and discuss the concepts behind portfolio theory, clearly identifying advantages and disadvantages or limitations to this theory.
The portfolio theory is a diversification of shares and related investments such as cash in savings accounts, and derivative products such as single stock futures in order to maximize expected return. According to Miguel de Cervantes, he said that don’t put all your eggs in one basket. Because when we depend on only one thing, if it is not work or it is fail, we may lose all resources in that one place. In order to minimize the chances
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Commonly, stock mutual funds can provide growth, but we cannot gain much returns. Bond funds are the opposite. They produce income and may also provide some growth over time. A well-diversified portfolio should include a mix of stock and bond investments, since stocks and bonds react differently to the same economic and market conditions.
Stocks are affected by specific market or industry news. However, bonds respond more directly to changes in interest rates. By blending a variety of different investments with various characteristics, investors can reduce their overall risk while increasing their potential for greater long-term results. (Ariel Investments)
When we concentrate put all prospects or resources in one thing or place, or we could lose everything.

By utilize portfolio, we can decrease risk of losing all investment funds. For example, if we invested all money into a factory’s stock. If that factory bankrupted due to market condition, we will lose all the
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But it can limit our downside by averaging out risk and volatility across a group of investments. It can limit our upside too. As our level of utilizing portfolio increases, our returns will be more likely to mimic the market average.
Furthermore, when we invest on the risky projects or don’t know clearly, the risk is possibly occur. For instance, an investor who lacks exposure to pharmaceutical firms, hedge funds, and knows nothings easily makes a mistake and cannot take advantages from utilizing portfolio. Another example, if we divide our cash to invest in five projects, but those five projects are all bankrupt, we will not get anything.
What is more, time consuming is needed much more in order to separate investment funds to a lot of companies. There are a lot of transactions and issues to consider as well.(

4. Viewpoint A: Stock option grants are good because they motivate executive to act in the best interest of

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