Explain Portfolio management through diversification
A portfolio manager has been asked to construct and manage a portfolio with a capital appreciation objective. The manager is subject to the following guidelines presented in the investment policy statement:
a) The portfolio should contain both large and small company shares.
b) The portfolio should contain a maximum of 40 percent large company shares.
c) The portfolio should contain a minimum of 40 percent small company shares.
d) The portfolio should contain a maximum of 15 percent cash.
The portfolio manager has constructed the following portfolio:
|
Security
|
Dollar Value of Investment
|
Large Company
|
Small Company
|
|
National Australia Bank
|
$170,000
|
X
|
|
|
AMP
|
$165,000
|
X
|
|
|
Woolworths
|
$175,000
|
X
|
|
|
Energy Developments
|
$87,500
|
|
X
|
|
Pacific Brands
|
$85,000
|
|
X
|
|
PMP Limited
|
$80,000
|
|
X
|
|
MYOB
|
$60,000
|
|
X
|
|
Cash
|
$177,500
|
|
|
With reference to the work of Evans and Archer (1968), briefly discuss the level of diversification exhibited by the portfolio.