Excerpt from Dissertation:
Furthermore, a young buyer may hold mainly equities.
Investor risk tolerance is yet another impediment to achieving asset class variation. Investors can low risk tolerance, for example , are not likely to hold substantial equity positions and even not as likely to utilize more obscure securities like hedge funds. However, portfolios with no equities might be highly vunerable to changes in the prevailing interest rates and therefore lack diversity. Indeed, for most investors a fully-diversified profile across advantage classes is not attractive for their investment objectives, time frame and risk tolerance.
Lastly, asset school diversification can be hampered by knowledge of property classes. Without even considering growing asset classes, many classes require specific knowledge – commodities, forex, real estate to name a new – that may deter investors via utilizing these people. Even comparatively common advantage classes such as preferred stocks, zero promotion bonds or perhaps mutual funds can be adequately confusing. The level of willingness associated with an investor to use an asset school is immediately related to the investor’s capacity to understand the class.
Achieving geographic diversification also comes with a unique set of impediments. There is, particularly, a domestic bias in equity holdings among buyers (Rowland, 1996). Investors will be more familiar with household firms, understand their working environment better, and have better access to info on those firms. Moreover, domestic firms are subject to a similar reporting requirements – the reporting strategies and structures for foreign firms may not be familiar for the investor, resulting in a knowledge difference.
Transaction costs – beyond those linked to rebalancing – are also a factor unique to geographic diversification. Purchasing worldwide equities is more difficult than purchasing home-based equities and comes with higher transaction costs as a result. Shareholders may be hesitant to absorb these costs and seek to discover geographic diversification in other ways, such as through mutual money.
Knowledge and transaction costs are continuing themes – these lead to investor’s unwillingness to fully undertake portfolio variation. Investors choose to put their cash into musical instruments and businesses they understand. The solution should be to broaden the investor’s expertise, a difficult process at times. Traders may balk at deal costs, and for that reason there must be a rational financial decision constructed with respect for the benefits of diversity vs . The costs. The road blocks to diversity can be overcome, once the investor understands the value of building a completely diversified profile in terms of risk reduction.
Performs Cited:
Polakow, D. Gebbie, T. (2008). How a large number of independent wagers are there? Journal of Asset Management. Vol. 9, 5, 278-288.
Rowland, P. (1996). Transaction costs and intercontinental portfolio
