Evaluating the Relationship between Diversification and Portfolio Risk in Stock Market of Tehran with Regard to Value at Risk

The main objective of this study is to determine the relationship between diversification and portfolio risk with regard to Value at Risk. In this respect, the risk associated with stock prices of 15 selected companies from the stock market of Tehran and the investment portfolios made for these companies have been analyzed. In order to clarify the relationship between stock prices of different companies and diverse investment portfolios, four different portfolios were made based on the type and the degree of correlation between daily prices of stocks. Return, risk, Value at Risk and the stock portfolios were calculated to determine the effect of creating systematic portfolio on return and risk. The parametric method of variance-covariance has been used to calculate values at risk. Results significantly show reduction of Value at Risk resulted from portfolio diversification. Results also show an increase in Value at Risk within the movement from portfolio 1 (negative correlation) toward portfolio 4 (positive correlation). Having evaluated the calculations in different time horizons, it was observed that increase in maintenance periods is accompanied by increase in Value at Risk. Results also show an increase in Value at Risk while shifting from reliability of 95 percent to 99 percent.

Keywords:

portfolio , diversification , return , risk , Value at Risk