Measuring investment risk and reducing it by diversification

Abstract

Investing is an unavoidable segment of any business activity. Investment decisions are associated with a certain amount of risk. Risk is a state in which there is a possibility of negative deviation from the desired outcome that we expect and hope for. The sensitivity of investments to certain types of risk depends on the specifics of the investment process, environment, type and size of risk. Higher exposure to risk factors results in higher expected returns. Measuring investment risk and reducing it by the method of diversification is the topic of this paper.