Investment dispersion refers to how much individual returns in a portfolio deviate from the average. It's a measure of risk and performance, helping investors diversify and limit the effect of underperforming investments.
Dispersion in investment is helpful in assessing portfolio risk. Higher dispersion means a wider range of returns, while lower dispersion indicates less variance. The goal is to minimize risk and optimize returns.
Types of Dispersion Measurement:
There are two main types:
This method compares portfolio returns to a benchmark index. High volatility compared to the index indicates high beta dispersion.
This method compares individual investment returns to the portfolio average. High differences signify high dispersion.
Assesses investment risk.
Evaluates individual investment performance.
Useful for portfolio diversification and risk reduction.
Helps maximize returns and minimize risk.
Investment dispersion offers several benefits:
Helps in deciding which investments to include in the portfolio based on their risk level, encouraging diversification.
Identifies high and low-risk investments to manage portfolio risk exposure effectively.
Allows for the evaluation of individual investment performance, informing buy or sell decisions.
Identifies high and low-return investments to optimize portfolio returns.