Diversification in Stock Portfolios in Book Report

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Using a Technical analysis is equally ineffective since this analysis would not necessarily focus on the financial statements of the company, but rely on trends in the economy, price trends and overall market tendencies to predict where a particular type of stock will go. While this strategy is risk aversive in general, the point becomes moot again as the overarching quality of all stock in this economy rise and fall together.

In Market B. however, the overall diversification of stock returns makes the possibility of creating a better risk averse portfolio much more likely. Both techniques of investing previously discussed work extremely well in this economy for both high risk and low risk strategies. Using a fundamental analysis one can make more valid assumptions about the future of a company from its financial statement. While any company health is certainly partially regulated by economic trends, in Market B. there is a better chance that a health company can survive extreme lows in a bad economy yet thrive in a good one. In Market B. A technical analysis is also quite useful in gaugingin risk on many levels.

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While some companies in certain economies may flourish, others may not, so by predicting trends in the overall economy one can ferret out those companies that would be more successful than others given the same circumstances.

In Market A diversification of holdings would most certainly have a minimal impact on overall risk aversion, whereas in Market B. diversification would be the key to mitigating risk in unfavorable market conditions. If we look at reality for a minute we see that stocks that rise and fall together will most certainly crash together as was evidenced in the past (Lopus, 2005). In Market B. diversification will more greatly mitigate risk than in Market A......

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