Index Investing: From Theory to Practice · Dr MAI Huu Minh, TRAN Phan Bao Ngoc & HUYNH Nguyen Quoc BuuChapter 4 of 37 · Module 2: Theory
CHAPTER 4
Diversification and Modern Portfolio Theory
Why owning many stocks beats owning a few
Opening question
“I know my five favourite Vietnamese stocks well. Why should I own hundreds of companies I have never heard of?”
In this chapter
- Expected return and standard deviation as measures of reward and risk
- Covariance and correlation: why assets that do not move together are valuable
- The two-asset portfolio formula and the efficient frontier of Harry Markowitz
- Systematic and specific risk: what diversification can and cannot remove
- The capital asset pricing model, beta and the market portfolio
- Why the market portfolio is the natural starting point for investors
- The limits of the theory: estimation error, fat tails and crises
- Concentration in Vietnam and the value of regional and global diversification
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This chapter is in the full book
Chapter 1 is free to read online. The full text of chapter 4 — with its tables, figures, worked examples and practice lab — is available in the complete edition of Index Investing: From Theory to Practice (Volume 1, NXW Investment Library).
Read Chapter 1 freeGet the full book — contact@nxw.vnSections of this chapter
4.1 Risk and return
4.2 Covariance and correlation
4.3 The two-asset portfolio
4.4 The efficient frontier
4.5 Systematic and specific risk
4.6 The CAPM and beta
4.7 Why the market portfolio is the natural starting point
4.8 The limits of modern portfolio theory
4.9 Diversification in Vietnam and Asia