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If most people are rational, why do you think they ail to diversify properly? In particular,...

If most people are rational, why do you think they ail to diversify properly?
In particular, why do they fail to include foreign securities in their portfolios?
Explain and eloborate in detail
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Answer #1

Portfolio Diversification

Most of the investors behave rationally and thus they wish to reduce the risk in the portfolio. The best strategy to reduce the risk is Diversification. Diversification means investing in differnt kinds of investments, so that the risk will be shared among these investments

Investors fail to diversify properly due to over concentration in one particular company or industry. Sometimes they fails to analyse different product types to invest in.

They fail to include foreign securities in their portfolio by considering the following factors:

1. The currency exchange risk and

2. Political risk that may occur when the location of the investment changes from country to country.

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