Final answer:
Both the Mean-Variance Optimization Model and Tactical Asset Allocation are tools that help in determining an optimal investment portfolio. Diversifying an investment portfolio is crucial for minimizing risk without assuring economic success, and can be done through various financial assets like stocks, bonds, and mutual funds.
Step-by-step explanation:
The tools that can help to determine an optimal investment portfolio are the Mean-Variance Optimization Model and Tactical Asset Allocation. The Mean-Variance Optimization Model, created by Harry Markowitz, bases on the principle that for a given level of expected return, an investor should aim to minimize risk, and for a given level of risk, seek to maximize return. This model uses statistical measures such as variance and covariance to determine the most efficient portfolio by plotting expected return against risk.
Tactical Asset Allocation, on the other hand, is a strategy that allows investor discretion to adjust the asset allocation of a portfolio given current market forecasts. It involves adjusting the investment mix to position for short to mid-term market opportunities, making it somewhat more active than a purely strategic allocation that remains fixed over time. Diversification, a key principle in investing, can lower the risk of an investment portfolio by spreading the assets across various investments, sectors, and geographic locales.
1. The importance of diversification
Diversification is fundamental because it helps mitigate undesired risk from a portfolio. It does not assure economic success, but it can reduce the volatility of the portfolio over time. Diversifying your investment portfolio is crucial in order to avoid excessive exposure to any single source of risk.
2. Assortment of saving and investing options
To save and invest, individuals have a wide array of options, including stocks, bonds, and mutual funds. These assets offer different levels of risk and potential return, and they can be purchased through various platforms including stock brokers, online trading platforms, and directly from mutual fund companies.