Diversification
is more effective when it is across asset classes
such as bonds, cash, property and commodities,
and not just across equities. The idea is to have
low correlation between asset classes, so if equities
do badly, commodities may do well. The most groundbreaking
theory of asset allocation is known as Modern
Portfolio Theory, which was published in 1952
in the Journal of Finance. Harry Markowitz, the
author of the theory, developed the concept of
the Efficient Frontier, which is the set of asset
distributions that gives the highest returns for
any given risk.
If you have the appetite to find out more, visit
the online investment library of Seven Investment
Management at www.7im.co.uk, where you will find
free access to informative and easy-to-read articles
about the importance of asset allocation in portfolio
construction.
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