Investment Enhancement Paper - Essay Example

Also by diversify portfolio investors are able to earn more consistent returns on their investment and if one stock does not perform well and does not yield positive return then the other one could perform well and yield positive return thus the overall risk of the portfolio is reduced and investors are in a position to save their investment from fluctuations of stock as well as market. There are different techniques that investors around the world use to diversify their portfolio and maximize their return.

Investing internationally or in the international markets is one of the most common techniques that investors use to diversify their portfolio. This gives more chances to investors to enhance their investment and earn better returns. In addition to while making investment internationally, investors have also used alternative investment vehicles to diversify their portfolio and to enhance their investment. This report analyzes how investors around the world have been diversifying their portfolio by investing internationally and by making use of alternative vehicles.

international portfolio diversification on an investment portfolio When investors are investing in a particular asset they normally face two types of risks. These two types of risk are; systematic risk and nonsystematic risk. These types of risk influence the stock price and thus the return of the investors is changed. Non-systematic risk is the risk of a particular asset, stock or company in which the investment is being made and it is also called the diversifiable risk as it can be reduced drastically by creating a portfolio and diversifying the investment.

The other kind of risk is called the systematic risk and it is the market risk or risk of a portfolio. The risk of a stock is reduced by diversifying the portfolio and by making investment in stock of different industries. However even after diversifying the portfolio in a particular market, the market risk cannot be reduced (Gitman, 2003). The following graph shows that as the investor diversifies its portfolio the non-systematic risk of the portfolio reduces and as the portfolio becomes more and more diversified, the non-systemic risk reduces.

However by diversifying portfolio, the systematic risk or market risk is not diversified or reduced. Market risk is the risk that can be because of fluctuations in the market, economic condition of the country, political instability and several other macroeconomic factors that would directly or indirectly impact the stock prices. (Source: Systematic versus Non-Systematic Risk) So in order to enhance the investment and further reduce the risk of the portfolio, investors have started investing stocks and assets in other countries as it reduces the market risk.

By investing in different markets, the impact of change in the return because of a particular market is reduced in the overall investment and therefore the overall risk of the portfolio is reduced. The following graph reflects that the risk of the portfolio is further reduced as stocks from other parts of the world are included in the portfolio. Therefore diversifying portfolio and investing in different stocks around the world would reduce the risk of the portfolio and therefore it would enhance the investment.

So, investing internationally would reduce the market risk and thus the overall risk