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The term portfolio is usually applied to combinations of securities but the principles underlying security portfolio formation can be applied to combinations of any type of assets including investment projects Most firms diffuse their efforts across a range of products market segments and customers in order to spread more thinly the risks of declining trade and profitability If a firm can reduce its reliance on particular products or markets then it can withstand more comfortably the impact of a major reverse in any single market Diversification can generate some major strategic advantage for example the wider spread of activities the greater the potential access to high performing market sectorsThe modern portfolio theory was developed by Harry Markowitz presenting it in 1952 in an article entitled Portfolio Selection Markowitz was the first to show the important benefits from diversification that arise from combining individual securities into portfolios and to demonstrate that the portfolio decision problem of an investor is equivalent to the maximisation of his or her expected utility Modern Portfolio Theory explores how risk averse investors construct portfolio in order to optimise market risks against the expected return The theory suggested that we could reduce the standard deviation of returns on asset portfolio by choosing assets which do not move togetherAllocating funds to a single security can be an extremely risky investment The primary reason for investing in portfolios is diversification that is the allocation of funds to a variety of securities in order to reduce risk As the number of securities held in the portfolio increases the overall variability of the portfolios return measured by its standard deviation diminishes very sharply for small portfolios but falls more gradually for larger combinations This decline in risk is achieved because the exposure to the risk of volatile securities can be offset by the inclusion of low-risk securities or even high-risk ones so long as their returns are not closely correlated The key point here is that
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