Effects of diversification of assets in optimizing risk of portfolio

Abstract

Diversification is a strategic option that investors use to optimize their portfolio. Diversification is investing in many assets for the purpose of minimizing risk or maximizing return of portfolio. It is an opportunity by which investors improve from his micro-firm into macro-firm. The investors’ aim is to make an optimal choice that leads to minimization of risk and maximization of return, but the platform that achieves these objectives is not at the finger tips. The purpose of this study is to propose procedures for constructing optimal portfolio for rational investors. Also, the study demonstrates the benefits of diversification of each asset in portfolio. The assets allocations divulge by Black Litterman model are used to estimate risk of both portfolios and assets. We explore DataStream (Yahoo finance) of Gold, Oil, Silver and Platinum. It is observed that diversifying in Gold minimizes higher risk and achieve more benefits than other assets in the portfolio, which made portfolio1 to be optimal portfolio. In view of these facts, it means diversifying in gold acts as hedge/safe haven for investors during economic recession.