Explain to me at least 5 ways securities investors can construct efficiently and well diversified portfolios.

Ways securities investors can construct efficiently and well diversified portfolios

Diversification refers to a risk management technique used to reduce the potential risks associated with uncertainty of the investment portfolio. There are many ways of diversifying portfolio:

i) Use asset allocation

This is the easiest way of diversifying the predetermined mix of bonds and stock. By using asset allocation, this will alter the portfolio risk profile over time.

ii) Invest in a mix of mutual funds

By using exchange traded funds (ETFs), risk in portfolios are diversified.

iii) Invest in international markets

Investors can diversify their portfolios by investing not only in domestic securities but also in international securities. This will reduce the risk of local market changes in securities.

iv) Vary company size and type

Investors can diversify their portfolios by in two levels between asset categories and within asset categories by investing in companies and stocks of different types and sizes.

v) Customize with individual stocks and bonds

Investors can diversify their securities by designing their tailor-made mixture of stocks and bonds that behave uniquely. This helps in risk diversification.