DEFINITION:

Nowadays, investors need to be careful about the risks they take while also aiming to make
money.

Kasi nga The world of investing, it can change very quickly, with new advanced technologies
and global events affecting the markets. Investors want to balance the chance of losing money
with the opportunity to make a profit, whether they’re saving for retirement or trying to grow
their wealth.

Today, we’re going to talk about how spreading your investments can help lower risk, along with
two tools that can help you understand it better: the Capital Market Line (CML) and Security
Market Line (SML). These tools show how much risk you’re taking on and how much return you
might expect, which can help you make smarter investment choices.

When you understand how diversification works and how to use tools like the CML and SML,
you can make better decisions about where to put your money. Whether you’re trying to save for
a house, plan for retirement, or just grow your savings, knowing how to spread your investments
and manage risk can help you reach your goals more effectively.

CAPITAL MARKET LINE

DEFINITION
So think of the CML or the Capital Market Line as parang visual guide that will help you
understand how risky different portfolios are and how much money you might make from them.

When we say portfolio it refers to a collection of financial assets such as stocks, bonds, mutual
funds, or other investments, so in other words, Hindi lang iisang investment ito, it is collection of
different investment.

So parang tumitingin ka lang Isang mapa, where in, hinahanap mo yong daan that might lead you
to the most rewards, while taking into account how risky those paths might be.
 so through CML hinahanap mo yong the best portfolio or combination of different investment
that will lead you to the most rewards, while taking into account gaano ka risky yong portfolio na
iyon.

The CML works on the Idea that investors are smart and always want to make the most money
they can from their investments. Which is Ganon Naman dapat talaga yong mindset ng mga
investors, for me, kasi when it comes to investments as an investor, you need to make sure na
Hindi ka malulugi, na meron at merong babalik Sayo Mula sa mga investment mo, so as an
investor, you really need to be smart. So kung mag iinvest ka, you really try to make the best
decisions with your money to get the biggest rewards possible.

Now Using the CML, investors can have smart decision by figuring out the best combination of
investments that gives them the most return for the amount of risk they are comfortable with,
meaning yong amount ng risk na kaya nilang e-tolerate or e manage.

STRUCTURE
So, first we have the Efficient Frontier, it is a concept in finance that represents the set of optimal
portfolios, when we say optimal we mean those portfolios that offer the highest expected return
for a given level of risk or the lowest risk for a given level of expected return.
So what do we mean ba by highest expected return for a given level of risk or the lowest risk for
a given level of expected return.

1. **Highest Expected Return for a Given Level of Risk**: When we talk about seeking the
“highest expected return for a given level of risk,” we’re looking for the investment
option that provides the best balance between potential returns and risk. In other words,
we want to maximize the returns we can achieve while taking on a certain level of risk
that we’re comfortable with, again those risk na kaya natin e-tolerate or e manage.

2. **Lowest Risk for a Given Level of Expected Return**: Now, let’s flip the scenario.
Suppose you have a target level of return that you want to achieve from your investments.
You’re looking at different investment opportunities, each offering different levels of risk.
When we talk about finding the “lowest risk for a given level of expected return,” we’re
aiming to identify the investment option that allows us to achieve our desired level of
 return while exposing ourselves to the least amount of risk possible. In this case, we
prioritize minimizing risk while still meeting our target return.

So basically, these concepts highlight the importance of striking a balance between risk and
return in investment decision-making.

So lahat ng mga points dyan sa curve na yan, represents those portfolios are considered optimal
because they strike a balance between risk and return that aligns with the investor’s preferences
and objectives.
So question, how about Naman yong portfolios located above the efficient frontier, Diba mas
higher returns Sila?
Technically yes, they offer higher returns than those inside the curve , however those portfolios
have higher risk also,
So if Kaya ng business to manage the higher risk, they can choose to invest doon sa mg Porfolios
above sa frontier, na yes higher returns but higher risks also.
However, when it comes to business Kasi, there is uncertainty, we don’t know what will happen
the following week , month or year, so we don’t know if kung mag iinvest ka don sa Porfolios na
higher risk, may returns or may mababalik ba sayo na worth don sa nirisk mo. In other words,
Magkakaroon ba ng balance, between risk and return.
Kasi yon yong purpose ng graph na ito, it will show you those optimal portfolios, or yong
portfolios na balance yong risk and return trade off , para you can sure that may mamaximize mo
yong returns mo while minimizing the risk.
Lets say, the same nag invest ka sa portfolios na higher sa curve or sa efficient frontier, pero
lower risk namn but the problem is usually those porfolios are often accompanied by increased
exposure to unsystematic risk or those risk that specific to the company or assets. Meaning to say
yong risk na particular mismo sa company or sa investment, Hindi siya risk that affects the
whole market.

Talking about return and risk, so the expected return is located in y-axis ng graph, yong line
vertical, it refers to the anticipated rate of return that investors can expect to earn on a portfolio.
Then the standard Deviation, located in the x axis of the graph, yong line namn na horizontal, it
represents the measure of risk associated with a portfolio’s returns. It helps investors understand
the level of volatility or variability in returns.
NEXT SLIDE
Now the line na naka-slant that is what we call the Capital Market Line, the CML The CML
starts at the risk-free rate o as you can see nag start siya don sa Rf., yong Rf Yan, yan yong risk
free rate, and ito yong rate of return ng mga risk free assets.
Risk free assets, are those assets where investors can earn return without taking on any risk. So
Kaya nga risk free asset Diba, meaning walang risk, sure na may maiibalik kapag mag-iinvest
ang insang investor Dito sa risk free assets, like for example government bonds.
Again yong RF na yan, it represents yong mga returns ng mga risk free assets.
As the CML extends upwards and to the right, The diagonal slope signifies that as investors take
on more risk by investing in risky assets, they expect to earn higher returns. So the more
papalayo na sa risk free rate yong slope, the more risky na yong mga assets, or in other words,
kapag mag iinvest kunwari yong investors somewhere in the right side ng slope, meron na itong
kaakibat na risk.
Now the point, where in nag meet itong efficient frontier and CML, this what we call the Market
Porfolio, The market portfolio consists of all risky assets in the market, and also represent the
most efficient Porfolio in the market, because it represents the best mix of investments or in other
words the best portfolio that offers the most efficient balance between risk and return.

Now, nasabi nga Dito na CML indicates the optimal portfolio combinations that provide the best
balance between risk and return.

Meaning to say all points located along the CML, these are optimal portfolios, because it
incorporate or combines both e risk-free asset with the risky assets .

That is why nasabi din natin na Market portfolio represent the most efficient Porfolio in the
market, Kasi nga andon siya along the CML.

So again, all points located along the CML, these are optimal portfolios, because it incorporate or
combines both e risk-free asset with the risky assets .
So meaning to say, through CML, it allows investors to invest in a risk free assets, And itong
combination of risk-free assets with risky assets allows naman investors to balance their
portfolio's risk. Riskier assets offer the potential for higher returns but also come with risks. By
including the risk-free asset, which provides a guaranteed return, investors can offset some of the
risk associated with the risky assets.

Now, Including both safe/risk free and risky assets in these portfolios allows for diversification,
Diversification helps reduce the overall risk of the portfolio without sacrificing potential returns,
enhancing the portfolio’s efficiency.
In other words, This shows how investors can create diversified portfolios that include both safe,
low-risk assets and riskier, higher-return assets.

EXAMPLE
For the example
Portfolio A has a lower standard deviation (6%) compared to the market portfolio (9%). As a
result, Portfolio A offers a lower expected return (13%) compared to the expected market return
(18%). This suggests that Portfolio A is less risky than the market portfolio, but it also offers a
lower potential return.Portfolio B, on the other hand, has a higher standard deviation (15%)
compared to the market portfolio (9%). Due to its higher risk, Portfolio B offers a higher
expected return (28%) compared to the expected market return (18%). This indicates that
Portfolio B has the potential for higher returns, but it comes with increased risk.

Portfolio A lies to the left of the market portfolio, indicating lower risk but also lower expected
returns compared to the market.Portfolio B lies to the right of the market portfolio on the,
indicating higher risk but also higher expected returns compared to the market.

So Investors can choose between Portfolio A and Portfolio B based on their risk tolerance, or
yong risk na Kaya nila or comfortable silang e-manage and return objectives. Portfolio A may be
suitable for investors seeking lower risk, while Portfolio B may be more appealing to those
seeking higher potential returns, with increased risk.

BENEFITS
 A. When investors build their portfolios, of course, they’re putting together different
investments like stocks, bonds, and other assets. And yong goal nila is to get the best
possible returns while keeping risks under control. So basically naghahanap Sila ng
balance between making money and not taking on too much risk.

So para lang siyang napa-plano for a road trip. You want to reach your destination (in our context
we want reach high returns) without running into any roadblocks (yong roadblocks naman are
the risks).
The Capital Market Line (CML) acts as a map for investors on this journey. Through CML,
nakakatulong ito sa mga investors para ma assess how much yong expected returns and yong
risks associated with those portfolios.
The same sa isang mapa, it enables us to see where is our destination, and see the roadblocks
going to the destination.

That is why, by looking at the CML, investors can pinpoint the portfolios that fall right on the
CML. These are the most efficient combinations of investments. They offer the highest returns
for a given level of risk.

Identifying these efficient portfolios helps investors make smart decisions about where to put
their money. They can optimize their portfolios by allocating assets in a way that maximizes
returns while managing risks effectively.

B. **Risk Management: The CML provides a framework for measuring and managing risk.**
- Certainly! Here’s a more conversational version:

Managing risk is very important for investors Kasi nga it helps them to safeguard or mapa
protektahan yong mga investments nila from possible risk and para ma achieve yong financial
goals nila.

Now with, Capital Market Line (CML) it lays out the risks and potential rewards of different
investment options.
With that it helps investors na makapagdecide how much risk they’re comfortable taking or yong
risk na kaya lang e-manage or e-tolerate. By using the CML, investors can assess whether the
potential rewards of an investment are worth the risks involved. They can then adjust their
investment strategies to find the right balance between risk and return.

A. **Benchmark for Performance Evaluation: The CML serves as a benchmark against

which investors can evaluate the performance of their portfolios.**

Evaluating how well your investments are doing is very important as it helps you figure out if
yong investment strategy ng isang investor is working or not ba. It’s like checking kung masarap
na ba yong niluluto nating ulam or Hindi.

The Capital Market Line (CML) helps investors measure the performance of their investments.
And It sets the standard for what’s considered good performance in the market. So, by comparing
how your portfolio is doing against the CML, you can see if you’re doing better or worse than
expected.

For example si investor, nakita Niya that yong Porfolio niya ay nasa baba ng CML, Portfolios
below the CML may not be achieving the highest possible return for the level of risk they are
taking. In other words, they are not as efficient or balance as portfolios on or above the CML.

From there, magkakaroon Sila ng adjustment sa investments nila to better match their goals or
they need to change things up to adapt to changes in the market. Either way, the CML helps you
see where the investor stand and make smarter decisions about their investments.

LIMITATIONS
Sure, let’s discuss each point:

A. **Assumptions of Efficient Markets:**

In simple terms, the Capital Market Line (CML) assumes that financial markets work perfectly.
It means that whenever there’s new information about a company or the economy, the prices of
stocks and bonds adjust immediately to reflect that info. However, in real life, markets aren’t
always perfect. Sometimes, it takes time for prices to catch up with new information. This can
create differences between what people expect to earn from their investments and what they
actually earn. So, while the CML gives a good idea of how investments should perform, in
reality, things might be a bit different due to market imperfections.

B. **Ignoring Non-Market Risks:** Sure, let’s simplify:

The Capital Market Line (CML) mainly looks at risks related to how the whole market behaves,
like if the stock market goes up or down. Or any circumstances that affecting the whole market,
so doon lang Naka focus Ang CML. But it doesn’t pay much attention to other risks that can
affect specific companies or industries. These risks can be things like changes in management,
problems with products, or legal issues for a company. Or they can be broader issues, like new
rules or new technology that affects a whole industry.

Ignoring these kinds of risks means investors might not see the full picture of what could go
wrong with their investments, and they might miss out on chances to protect their investment
because, only those risk lang na sa whole market ang kino-consider ng CML, at Hindi mga
specific na risks.

C. **Reliance on Historical Data:** Sure, here’s a simpler version:

The Capital Market Line (CML) looks back at how things went in the past para ma guess nila
kung ano yong possible na mangyayari in the future.

CML uses data from the past to figure out what returns to expect and how risky an investment
might be. This helps investors make smart choices about where to put their money.

However there’s a catch:

Kasi nga what happened before might not happen again. Kung anong nangyari before or in the
past, hindi naman ibig sabihin non eh mangyayari again in the future.
Kasi nga things change in the market, kaya nga nasabi ko sa introduction kanina na, in the world
of investment, it can change very quickly,
like the economy, what people think, and how they feel about investing.
That is why Investors still need to keep an eye on what’s happening now or monitoring sa
market or kung Anong nangyayari currently sa market and think about what might happen next
or forecasting. This way, they can be ready for whatever the market throws their way or
makagawa Sila ng mga strategies to mitigate mga potential risks.

SECURITY MARKET LINE

DEFINITION
Sure, let’s break it down:

So the same lang sa CML, itong Security Market Line, is a visual representation, na kung saan it
shows how much return you can expect from an investment or security and how risky they are.
So meaning to say, we are looking sa relationship between risk and return for an investment, so
Hindi na siya combination of investment, but sa isang investment nalang mag fo-focus.

Another think with The SML, it is based on a financial model called the Capital Asset Pricing
Model (CAPM). Itong model na ito helps investors evaluate the risk of an investment by looking
at how it is affected by the overall market conditions. And the SML graphically illustrates this
relationship.
So meaning to say through SML we are looking sa isang individual investment or asset and it’s
relationship with the overall market condition.

STRUCTURE
X-axis shows how much the investment’s returns might move with the overall market. It’s called
systematic risk, again yong systematic risks are that affects the whole market. And nererepresent
ito in what we call beta.
Y-axis tells us how much money investors think they will make or lose by investing in that
security. This expected return is based on things like how the investment has done in the past,
how it might grow in the future, and what’s going on in the market right now. So, the higher the
expected return, the more reward investors expect for taking on the risk of investing in that
security.

1. **Undervalued**:
- This means a security is priced lower than it should be based on how much risk it has.
- So, if you invest in an undervalued security, you might get more return for the risk you take.
- You’d see undervalued securities plotted above the line on a graph, showing they could give
you better returns than expected.

2. **Fairly Valued**:
- This is when a security is priced just right for the risk it carries, meaning to say balance lang.
- So, if you invest in a fairly valued security, you’d get the return you’d expect for the risk you
take.
- Fairly valued securities are right on the line on a graph, showing their price matches their
expected return for the risk.

3. **Overvalued**:
- This is when a security is priced higher than it should be based on its risk.
- So, if you invest in an overvalued security, you might get less return than expected for the
risk you take.
- Overvalued securities are plotted below the line on a graph, suggesting they might not give
you as much return for the risk you’re taking.

EXAMPLE
Security with Beta equal to 0.5:The calculated expected rate of return for this security is
9.5%.With a beta of 0.5, this security is less unstable than the overall market. It moves less than
the market in response to market fluctuations. The expected return of 9.5% is lower than the
market’s expected return of 14%. This is expected because the security is less risky than the
market as a whole. Investors are compensated with a lower return for taking on less risk.

Security with Beta equal to 1.5:The calculated expected rate of return for this security is
18.5%.With a beta of 1.5, this security is more unstable than the overall market. It moves more
than the market in response to market fluctuations.The expected return of 18.5% is higher than
the market’s expected return of 14%. This is expected because the security carries more risk than
the market average. Investors require a higher return as compensation for taking on this
additional risk.

Securities positioned to the left of the market portfolio on the SML offer lower expected returns
but lower risk, making them suitable for conservative investors.Securities positioned to the right
of the market portfolio on the SML offer higher expected returns but higher risk, appealing to
investors seeking greater potential returns but willing to accept higher risk.

Therefore, as per the graph, we can conclude that on the SML, all securities or investments are
properly priced. There is no undervaluation or overvaluation.

BENEFITS
Using the security market line makes it easy to calculate expected returns from assets.
Explanation: The security market line (SML) provides a straightforward way to estimate the
expected returns of different assets based on their systematic risk, represented by beta. Investors
can use this model to quickly assess the potential returns they might expect from various
investments, which simplifies the decision-making process.

Comparison of diversified portfolios:

Explanation: When comparing diversified portfolios, the SML focuses only on systematic risk,
which is the risk that affects the entire market.
So meaning ini-ignore na nito yong mga unsystamic risks,
By these, the SML simplifies the comparison process. It assumes that the portfolios being
compared are well-diversified, meaning they contain a variety of assets to minimize
unsystematic risk.
Considers Systematic Risk:
Explanation: The SML incorporates systematic risk, which is the risk inherent to the entire
market or a specific market segment. Unlike other models that may focus solely on factors like
dividends or financing costs, the SML recognizes the importance of systematic risk in
determining asset prices. By considering this broader market risk, the SML provides a more
comprehensive framework for assessing investment opportunities.

LIMITATIONS
Risk-free rate volatility:
Sometimes, the rate of return on risk free investments, like government bonds, can change,
which makes it hard to predict future returns accurately. Plus, these risk free assets or
investments might not last for very long, so their stability can be uncertain.

Market return reliance on historical performance: so the same lang sa CML The SML uses past
market performance to guess what might happen in the future, but this doesn’t always work
because markets can change unexpectedly. Even if the market did well in the past, it might not
keep doing well in the future, so we have to be careful.

The SML focuses solely on systematic risk,

So itong (SML), the same lang sa CML, it only considers one type of risk called systematic risk.
This type of risk is related to factors affecting the entire market, like economic trends or changes
in interest rates.

And it also assumes that If investors spread their money across many different types of
investments, they can reduce the risks that are specific to individual companies or industries,
which are ito yong tinatawag na non-systematic risks, and it include things like a company losing
customers or facing legal troubles.

However, even with a diversified portfolio, non-systematic risks can still affect how well
individual investments perform. For example, if a company goes bankrupt, it can hurt the value
of its stock, no matter how diversified an investor’s portfolio is.
So, kahit na very useful Ang SML is for understanding yong overall market risk, it doesn’t
account for all the risks that can affect individual investments.

COMPARISON
Scope of the Market Line:
So basically, si CML, nag fo-focus sa portfolios, while yong SML nag fo-focus sa individual
assets.

Components of the Market Line:

CML: Combines a risk free investment, like government bonds, with a portfolio of risky assets,
like stocks.
SML: Shows yong relationship between sa expected return ng asset and its risk level, usually
measured by something called beta.

Applicability of the Market Line:

CML: Helpful if you want to build a balanced portfolio that gives you the best mix of risk and
return.
SML: Useful if you’re trying to figure out if an individual asset, like a stock, is priced fairly
based on its risk level.

DIVERSIFICATION
In simple terms, when we say Investment diversification is like spreading out the investments so
that if yong isang investment is not doing well, Hindi nito ma-aapektuhan yong ibang
investments or yong buong kabuuan ng isang portfolio.

It’s similar to the idea of not putting all your eggs in one basket, where if something happens to
that one basket, you lose all your eggs.
Now, Asset allocation is a way to diversify your investments, so sa asset allocation, dini-divide ni
investors yong Money Niya in different types of assets of investments like stocks, bonds, and
cash.

DIVERSIFICATION BY ASSET CLASS

Diversification by asset class means spreading your investments across different types of assets
to reduce risk and increase the potential for returns.
So one type of asset class is stocks
1. **Stocks (Equities)**:
I think, na explain naman na ito ni sir from previous meetings natin, na when we talk about
stocks, we are referring to the ownership in a company, and when you buy stocks, you become a
shareholder, and entitled kana to a portion of the company’s profits.
- and then nasabi din that Stocks have historically provided the highest long-term returns
among the three asset classes. However, they also come with higher volatility or price
fluctuations. This means that while stocks can offer significant gains over time, they can also
experience sharp declines in value, especially during economic downturns or market uncertainty.

The next type of asset class is

2. **Bonds (Fixed Income)**:
- Bonds are loans made by investors sa governments or sa isang corporation. When you buy a
bond, you’re lending money to the issuer in exchange for regular interest payments, known as
coupon payments, and the return of the bond’s face value, or principal, at maturity.
-so compared sa stocks, Bonds are considered safer investments because they provide steady
income and have less volatility.
They are often used as a way to generate income, preserve capital, or diversify a portfolio.
However, bonds also come with their own risks, such as interest rate risk and credit risk.

3. **Cash (Cash Equivalents)**:

- Cash equivalents include highly liquid and low-risk assets that can be quickly converted into
cash without significant risk of loss. These may include savings accounts, certificates of deposit
(CDs), and money market funds.
 -among the asset class daw Cash is the safest asset class in terms of preserving capital, but it
also offers the lowest returns. While cash provides liquidity and stability to a portfolio, holding
too much cash for an extended period can result in erosion of purchasing power due to inflation.

Now, Investors can break these categories down further by factors such as industry, company
size, creditworthiness, geography, investing strategy, bond issuer and style. So in other words,
investors have the flexibility to further categorize their investments within each asset class based
on specific factors.
So like sa stock, may iba pang category under sa stock where in investors can put money on it.

DIVERSIFICATION WITHIN STOCKS

1. **Industry or Sector**:
- **Explanation**: so Imagine you’re investing in different types of businesses, so like for
example, nag invest ka sa clothing industry, then sa electronics, then nag invest ka din sa
business in the food industry.
Now By investing in a mix of businesses from different industries, you’re spreading out your
risk.
Some businesses do well when the economy is strong, like those selling fancy gadgets or new
cars. Others do okay no matter what, like companies selling groceries or utilities.

2. **Size or Market Capitalization**:

- **Explanation**: When diversifying in stocks, market capitalization tells you how big a
company is. Gaano ka laki yong isang company
There are Large companies (large-cap) which are stable because they have lots of customers and
resources, but they don’t grow as fast.
We also have Small companies (small-cap). They have more room to grow and can move
quickly, but they’re riskier because they’re smaller and more vulnerable.

By investing in companies of different sizes, you spread out your risk. Big companies give
stability, while small ones offer potential for growth. Mixing them in your portfolio helps
balance risk and reward.
3. **Style (Growth vs. Value)**:
- **Explanation**:
Growth Stocks: These are companies expected to grow fast. People pay more for their stocks
because they think they’ll make a lot of money in the future.
Value Stocks: These are companies whose stocks seem cheap or underpriced. People buy them
because they think they’ll go up in price once others realize they’re a good deal.

Diversification in investment style involves combining growth and value stocks in a portfolio to
balance risk and return. By holding both growth and value stocks, investors can capture
opportunities across different market environments and benefit from the strengths of each style.
This balanced approach helps smooth out the portfolio’s performance over time and reduces
reliance on any single investment strategy.

DIVERSIFICATION WITHIN BONDS

Sure, let’s explain each point further:

1. **Credit Quality**:
- **Explanation**:
Bonds from different issuers have different levels of creditworthiness,
When we say creditworthiness, ito yong parang measurement of how likely the issuer is to pay
back the loan (or bond) on time. So kung nakabayad on time meaning mataas yong
creditworthiness, kung di naman nakakabayad on time, it means na mababa yong
creditworthiness.
So basically ito yong history ng pagbabayad ng bonds and gaano ka safe mag invest ng bonds sa
isang issuer.

By investing in bonds with different credit ratings, you spread out your risk. If one bond issuer
runs into financial trouble and defaults on its bonds, it won’t have as big of an impact on your
overall portfolio if you have other bonds with different levels of credit quality.
2. **Maturity**:
- **Explanation**: Maturity refers to the length of time until a bond’s principal or yong
original amount invested is repaid. Bonds with longer maturities typically offer higher returns
because investors are taking on the risk of tying up their money for a longer period. However,
they’re also more sensitive to changes in interest rates. If interest rates rise, the value of longer-
term bonds can decrease. Shorter-term bonds have less interest rate risk but offer lower returns.

By investing in bonds with different maturities, you spread out your risk. Shorter-term bonds are
less affected by interest rate changes and offer more stability, while longer-term bonds offer
higher returns but are riskier due to interest rate fluctuations. Diversifying across maturities helps
balance risk and return in your bond portfolio.

3. **Type of Issuer**:
- **Explanation**: Bonds can be issued by different entities, such as governments,
municipalities, or corporations. Each type of issuer comes with its own level of risk and potential
return. Governments Treasury bonds, issued by the federal government, are considered the safest
because they’re backed by the full faith and credit of the government. Municipal bonds are
issued by local governments and may offer tax advantages. Corporate bonds are issued by
companies and typically offer higher returns but come with higher risk because companies can
go bankrupt.

By investing in bonds issued by different types of entities, you spread out your risk. If one issuer
faces financial difficulties or defaults on its bonds, it won’t have as significant an impact on your
overall portfolio if you have bonds from other issuers. Diversifying across issuers helps reduce
the concentration of risk and enhances the stability of your bond portfolio.

ADVANTAGES and DISADVANTAGES

1. **Enhanced Risk-Adjusted Returns**:
- **Explanation**: Diversification spreads investments across different assets, which can help
balance risk and potentially improve returns. By investing in a variety of assets that perform
differently under various market conditions, investors can achieve a better risk-adjusted return
compared to investing in a single asset or a concentrated portfolio.
2. **Mitigation of Losses**:
- **Explanation**: During periods of market volatility or economic uncertainty, diversification
can help mitigate portfolio losses. Different asset classes and types of investments react
differently to market events, so having a diversified portfolio can reduce the impact of negative
events on overall portfolio performance.

4. **Preservation of Capital for Older Investors**:

- **Explanation**: Diversification can be particularly beneficial for older investors or those
nearing retirement who may have less time to recover from significant portfolio losses. By
diversifying their investments across different asset classes, these investors can help preserve
their capital and reduce the risk of experiencing substantial financial setbacks in retirement.

Cons:

1. **Portfolio Management Complexity**:

- **Explanation**: Managing a diversified portfolio with many holdings can be challenging
for investors, especially if they lack the time, resources, or expertise to monitor and rebalance
their investments effectively. A large number of holdings may also increase administrative
burdens and make it harder to track portfolio performance accurately.

2. **Costs Incurred**:
- **Explanation**: Properly diversifying a portfolio can be costly, so mahal daw, Kasi nga
investors may incur fees and expenses associated with purchasing and maintaining different
types of investments. For example, mutual funds or exchange-traded funds (ETFs) may charge
management fees, and trading commissions may apply when buying or selling individual
securities.

3. **Risk Reduction, Not Elimination**:

- **Explanation**: While diversification can help reduce portfolio risk, it does not eliminate it
entirely. Certain market events or economic conditions may affect all asset classes
simultaneously, meaning sabay sabay leading to widespread declines in portfolio value.
Diversification is a risk management strategy, but it does not guarantee protection against all
possible losses.