Investors use financial instruments to diversify their portfolios from "summary" of Financial Markets and Institutions, Global Edition by Frederic S. Mishkin,Stanley G. Eakins
Investors often seek to diversify their portfolios as a way to manage risk. This involves spreading their investments across different types of financial instruments to reduce the impact of any individual asset's performance on their overall portfolio. By holding a mix of assets with different levels of risk and return, investors can potentially achieve a more stable and consistent investment performance over time. Financial instruments provide investors with a range of options for diversifying their portfolios. For example, they can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), options, futures, and other securities. Each type of financial instrument has its own unique characteristics, risk profile, and potential return, allowing investors to tailor their portfolios to meet their specific investment goals and risk tolerance. Diversification can help investors achieve a more balanced and resilient portfolio by reducing the impact of market fluctuations on their overall investment performance. For example, if one asset class is experiencing a downturn, another asset class may be performing well, helping to offset losses and maintain overall portfolio stability. This can help investors protect their capital and achieve more consistent returns over the long term.- Using financial instruments to diversify their portfolios can help investors achieve their financial goals while managing risk. By carefully selecting a mix of assets with different risk and return characteristics, investors can build a diversified portfolio that is better positioned to weather market volatility and achieve long-term investment success.
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