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Diversification |
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DiversificationDividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.DiversificationInvestment jargon for not keeping all your eggs in one basket. Diversification implies that you distribute your capital among various assets to reduce loss if, through bad luck or judgement, one of them fails you.There are four main areas of risk to think about.Asset allocation: spreading your investments among different classes of asset (bonds, equities, property etc)Shares: spreading your stock investments over a sufficient number of shares (or invest in a diversified collective fund)Sectors: making sure the shares you invest in are in companies operating in a variety of sectorsCountries: getting some exposure to economies outside the UK as well as in the UKMost people agree that diversification is essential to reduce risk. There is an argument that to make exceptional returns, you have to concentrate your investments - the big winners theory. 'Put all your eggs in one basket and watch that basket very closely'.Similar MatchesIndirect diversification benefitsIndirect diversification benefitsDiversification benefits provided by the multinational corporation that are not available to investors through their portfolio investment. Naive diversificationNaive diversificationA strategy whereby an investor simply invests in a number of different assets in the hope that the variance of the expected return on the portfolio is lowered. In contrast, mathematical programming can be used to select the best possible investment weights. Related: Markowitz diversification. Principle of diversificationPrinciple of diversificationThat portfolios of different sorts of assets differently correlated with one another will have negligible unsystematic risk. In other words, unsystematic risks disappear in diversified portfolios, and only systematic risks persist, those related to particular assets. Cone of diversificationCone of diversificationSee diversification cone. Sector diversificationSector diversificationConstituting of a portfolio of stocks of companies in each major industry group. Further SuggestionsCurrency diversificationEfficient diversification International diversification Unique Diversification Benefit Markowitz diversification Liquidity diversification Diversification cone |
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