Final answer:
Volatility in portfolio returns indicates risk, with statistical measures such as standard deviation used to assess it. Historical events like the dot-com bubble show that high-risk levels can lead to significant losses. Active management of investments typically results in better performance, with diversification reducing overall portfolio risk.
Step-by-step explanation:
Understanding the volatility of a portfolio's return is critical to assessing its risk profile. Investor preferences on risk and return vary, but it is generally seen that higher volatility equates to higher risk.
To evaluate portfolio volatility, one could use statistical measures such as the standard deviation, which quantifies how much returns deviate from the average. Diversification can reduce portfolio volatility, as it involves investing in a variety of assets to spread out risk.
Looking at past instances, high-risk investments have sometimes led to significant losses. This was notably evident during the dot-com bubble burst in the early 2000s or the 2008 financial crisis, where high-risk portfolios suffered substantial declines. Therefore, examining investments in the context of different time frames helps an investor understand potential long-term outcomes versus short-term gains.
When comparing two strategies, such as diligent monitoring versus random selection, typically the portfolio that is closely monitored and adjusted in response to market changes may have a better chance at stable performance.
However, there's also the possibility that a randomly selected portfolio could perform well, especially if it coincidentally includes high-growth companies. Nonetheless, regularly following financial news and being proactive in managing investments is generally advisable to minimize potential risks and adapt to market movements.
Lastly, regarding portfolio diversity, choosing to invest across a variety of sectors, asset types, and geographic regions can mitigate risk and potentially smoothen out returns, as the underperformance in one area could be compensated by gains in another.