RISK, RETURN, TRADE OFF, PORTFLIO AND DIVERSIFICATION Essay

RISK, RETURN, TRADE OFF, PORTFLIO AND DIVERSIFICATION - Essay Example We often hear a proverb that "Quality Never Cheeps"; same applies here that an investment with a low risk profile has a low investment return capacity as compared to an investment with a high profile of risk. Most of the investors are risk averse, but they are unaware of the fact that, while investing they have to indulge themselves into a number of risks, which they don't think; like interest rate risk, country risk, hazard risk and bankruptcy risk. This happens because the investor merely focuses on the financial risk and concern about the volatility among the prices of the asset or security, he have. It's a psyche of a person that, if we offer two investments offering the same expected return, but differing in risk, then a risk-averse investor will prefer the less risky investment. Most people invest in a number of assets or hold shares of a number of companies in order to diversify the risk. More precisely we can say that, people typically invest their wealth in a portfolio of as sets and will be concerned about the risk of their overall portfolio. Portfolio theory is used to diversify the risk of an investment; the theory was initially adopted by Markowitz in 1952 as a normative approach to investment choice under uncertainty.