Financial issue is a very important thing that individual has to face every day. Before deciding to make any investment, it usually involves a big decision making because we are afraid of losing the money. Many people assume that investment is risky but how many actually know that risk can be minimized? Risk is a situation that the future outcome turns out to be different than what we expected. In financial theory, it is usual to deal with situation involving risk because expected returns can be estimated and incorporated into the decision making process. There is a term called “do not put all the eggs in one basket.”
To minimize risk, investors diverse their investment. Diversification or portfolio is an idea of investing in many different types of security. The concept is to spread risk so that the loss in one security does not lead to losing all the money. If the stock price of one security is falling, the other security might be rising. However, it works well only when two securities are not in the same industry, so their stock price is not moving on the same direction. If the companies have a positive correlation or both are in the same industry, their stock price will be rising or declining at the same time. For example, Sihanoukville Autonomous Port and Phnom Penh Autonomous Port stock have a positive correlation, and their stock prices are moving on the same direction. For the last two months, both securities are rising and falling at the same time. However, Grand Twins International (Cambodia) and Phnom Penh Water Supply Authority do not have a positive correlation or are not in the same industry. The price falling of GTI does not affect the price of PPWSA stock. In this case, investor can get a full benefit from diversification.