The role of informal microfinance institutions in saving

which is expressed as a percentage of the starting of market value of an investment, while
return on a portfolio (whereas a portfolio is defined as a combination of two or more assets)
is a weighted average of return on the particular assets making up the portfolio.
Where there is diversification of investment, it is called portfolio investment. Levy and Sarnat
(1994) argue that when there is diversified investment, the investor reduces the risk while
increasing the return on his investment. This makes the objective of diversified investment to
maximize returns at a given level of risk.
Risk (standard deviation) of the assets involves events which may or may not occur, and is
defined as the variation of returns from those expected, and its probability of occurrence can is
calculated. When there is a spread of outcome, the stock is deemed as risky. The standard
deviation is used to measure the risk of the invested assets. When there is high standard
deviation, the stock will be deemed as more risky, that the one with lower standard deviation.
Investor considers both risk and returns when making investment decisions, preferring higher
returns and lower risk from his/her investment. This implies that if the investment has a higher
rate of risky, it will be chose by the rational investor if its return is higher to offset the risk
should it occur.
Brealey and Myers (2000) argue that investors may reduce the standard deviation of portfolio
return if they choose stocks, which do not move together. This is from the idea that if assets
are moving together, when they are combined together, they will increase the risk instead of
reducing it. A common measure used to measure as whether the assets are moving together is
correction coefficient. A positive correlation coefficient (usually taken as +1) shows that the
combined assets will not reduce the level of risk, while a negative correlation coefficient
(usually taken as - 1) shows that the combined assets will reduce the level of risk of portfolio.
On the other hand, when correlation coefficient is zero, the risk of portfolio will equal the
sum of variance of assets, while its return equals the individual assets returns.
There is also a view that investing in a portfolio regardless their individual behavior will not
reduce all risk when put together in a portfolio selection. There are two types of risks
associated with the stocks. These are market risk and individual stock risk. A well diversified
stock reduces stock risk, while not a market risk. This is because market (systematic) risk, apart
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