Explain portfolio management through diversification

Reference no: EM1316752

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.

Reference no: EM1316752

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