Final answer:
Portfolio management is an essential financial strategy that combines analytical and intuitive approaches to achieve specific financial goals, primarily through diversification, which is crucial for risk management and achieving more stable returns.
Step-by-step explanation:
Functions of Portfolio Management
Portfolio management entails strategically managing a group of investments to meet specific financial goals. The major functions include analyzing the performance of various components, diversifying assets to spread risk, and consistently reviewing and adjusting the portfolio to align with changing market conditions and personal objectives. As it combines analytical decision-making with intuitive judgment, portfolio management is often described as both a science and an art.
Diversification in Portfolio Management
Diversification is a core principle in portfolio management. Diversified portfolios are constructed by spreading investments across multiple asset classes and sectors to mitigate risk. It does not guarantee economic success, but it can lead to more stable long-term returns by reducing the impact of any single investment's poor performance.
Diversification is important to manage the risks associated with investing. By investing in a variety of assets, the risk of loss is spread, and the impact of market volatility can be dampened. This strategic distribution of investment allows investors to take advantage of different market conditions and potential growth in different industries.