Managers create a portfolio to diversify their investment in different industries or financial instruments. Such action reduces risks since the items in the collection react differently to similar events. Any business is affected by systematic risks like war, interest rates, exchange rates inflation and political instability. Similarly, there are unsystematic risks like financial and business risks that are specific to an economy, industry, country, or even company (Melicher & Norton, 2017). Diversifying your portfolio ensures that the company reduces such risks since the various assets are not affected by the market events in the same way. A manager, for example, can invest in savings products and investment products. Since the two are different in their risk and returns, the portfolio will help reduce the adverse effects of unsystematic risks.
A diverse portfolio should include a combination of investment products and savings products. A manager can choose stocks, mutual funds, bonds, savings accounts, CDs, and money market accounts. Investment products are more appealing since they have higher returns, but they are also risky compared to savings products (Melicher & Norton, 2017). However, the risks in investment products can be avoided by assuming a buy and hold approach since the market can go down for sometimes even years, but the trend will change latter.
Delegate your assignment to our experts and they will do the rest.
A combination of investment and savings products should be included in a portfolio since they help in managing risk and returns. Mutual funds, stocks, and bonds, for example, have high yields, yet their risks are high since the market can go down, wiping all the profit and even some of the invested capital (Melicher & Norton, 2017). Savings products, on the other hand, are less risky, but their returns are meager. It, therefore, implies that a manager should strike a balance between risk and return to manage the portfolio effectively. Doing so will enhance long term success and profitability.
Reference
Melicher, R., & Norton, E. (2017). Introduction to Finance: Markets, Investments, and Financial Management . Hoboken New Jersey: John Wiley & Sons.
