In this study, we investigate the attenuation of idiosyncratic risk and corresponding benefits of diversification for equally weighted and market capitalisation weighted portfolios in the UK Equity Market over 2002 -2012. We analyse the absolute benefits of risk reduction by testing the homogeneity of variances of portfolios of different sizes using Levene's Test. Next, we perform a cost-benefit analysis to determine the return benefit of diversification from a practical perspective. We find that the absolute benefits of diversification for an equally weighted portfolio are greater in the 'crisis' than 'pre-crisis' period, but when we analyse the results from a practical perspective the benefits fall dramatically and the results are reversed. When comparing the benefits of market capitalisation weighted and equally weighted portfolios, we note that the benefits of diversification tend to be greater for an equally weighted portfolio for small portfolios but that a crossover occurs as the size of the portfolio increases. The relative benefits of diversification under these different weighting strategies are thus highly dependent upon the state of the market and further study is needed to determine why the diversification benefits for the alternative weighting strategies decay at varying rates.

In this novel study, I investigate whether option implied volatility and implied volatility skew contain information capable of elucidating, in an ex-ante manner, the probability of exceptional foreign exchange price fluctuations. I study four of the most widely traded currency pairs and their corresponding options over varying option maturities and distinct definitions of volatility skew and price jumps, each over the period 1 Jan 2007 to 18 November 2013. I find significant evidence of such informational content in at-the-money implied volatility, implied volatility skew and currency forward premium, each with differing degrees of influence. Further, as opposed to results in existing literature on price jumps within the equity asset class, the ability of volatility skew to predict price jumps does not attenuate with an increasing option maturity up to three months. I also observe through probit marginal analysis how at-the-money implied volatility dominates in its influence of price jump probability, while currency carry and implied volatility skew hold smaller but nonetheless significant influence.