Investment theory and property diversification Essay

Investment theory and property diversification - Essay Example The purpose of having all four-asset classes represented in your portfolio is to take advantage of the different strengths of each class. However, stocks are grouped together because they would, as a group, react more alike than any of the other three classes. The same thing is true for the other three classes. Many people use Real Estate Investment Trusts and other liquid investments to satisfy the real estate leg of the asset class tool. The term investment closely relates the meanings in business management, finance and economics, related to saving or deferring consumption. People usually purchase an asset or equivalently a deposit is made in a bank, in the expectation of getting a future return or interest from it. An investor distributes his investments among various classes of investment vehicles (e.g., stocks and bonds) I order to capitulate the cycle of market potentiality. When a portfolio has an active risk, then, we treat it as the annualized standard deviation of the mont hly difference between portfolio return and benchmark return. Thus, an active risk of x per cent would mean that approximately 2/3rd of the portfolio's returns (one standard deviation from mean) can be expected to fall between +x and -x per cent of the mean excess return. It may be calculated as a realized or ex post number or as a forward, ex ante, or predicted, number (usually based on a multifactor model defining the co-variance relationships between each pair of securities in the current portfolio). In case of national investment, the theory goes one-step ahead to merge into diversified areas of productivity. CLASSIFICATION OF ASSETS: THE OBJECTIVITY The best-performing asset varies from year to year and is not easily predictable to calculate the returns in a market movement. Therefore having a mixture of asset classes is more likely to meet our goals. A more fundamental justification for asset allocation is the notion that different asset classes offer non-correlated returns, hence, diversification reduces the overall risk in terms of the variability of returns for a given level of expected return. Academic research has painstakingly explained the importance of asset allocation, and the problems of active management. This explains the steadily rising popularity of passive investment styles using index funds; cash via money market accounts for instance. Bonds procure high yield in government or corporate; short-term, intermediate, long-term; domestic, foreign, emerging markets. Similarly, stocks add value with large-cap versus small-cap; domestic, foreign, emerging markets in case of real estate. Economists refer to a real invest ment such as a machine or a house, while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset. In real estate, investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk. Many investors and analysts try to identify whether a market or security is in a profit or loss phase to generate trading strategies to exploit