Portfolio Management in turbulent times - Is diversification still possible? (PDF)

Seminar paper from the year 2022 in the subject Business economics - Investment and Finance, grade: 1,7, University of Applied Sciences Essen, course: International Investment, language: English, abstract: Looking at the newspaper and television reports on stock prices and their highs and lows in the various economic phases of recent years, it seems hardly surprising that an ambivalent impression of the events surrounding the stock market has taken root in the minds of a large part of the population. In accordance, newspapers and television repeatedly report on the one hand about miraculous increases in wealth caused by the strong and sometimes sudden rise of various stock prices. These reports force the question on one or the other, why one still works, since the earning of the large money at the stock exchange seems to be simple finally. On the other hand, the financial markets have been shaken again and again by crises, which have provided ample proof that it is not advisable to leave the earning of money to stocks alone.

Harry Markowitz, American economist and professor, is still one of the pioneers in the field of capital market theory with his modern portfolio theory (MPT). Every investor faces the hurdle of finding the most efficient portfolio. In this case, liquidity, risk and the expected return play the central triangle. Both the own risk awareness, which correlates with the return, and exogenous influences, such as in turbulent times, have an impact on the portfolio and its result. Markowitz and his MPT states that the reason for this is that the professional selection of securities in an investment portfolio within the framework of asset management reduces the risk of the portfolio in comparison to the risk of the individual securities. Accordingly, no one needs to fear the financial markets as long as he does not pay more attention to the individual securities than to the securities portfolio as a whole.

This paper provides an understanding of portfolio management, especially in turbulent times. The central question is whether diversification of the portfolio is still possible. What exactly diversification is and how to build an efficient portfolio with asset classes will be explained in the following chapters of this paper.

The reader should gain a solid understanding about portfolio management. For this purpose, some terminology will be explained in the theory part, which will then be applied in practice in the further course. Finally, possibilities are shown how to hedge one's portfolio in volatile times.