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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 MatchesNaive 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. Markowitz diversificationMarkowitz diversificationA strategy that seeks to combine in a portfolio assets with returns that are less than perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return. Related: Naive diversification. Indirect diversification benefitsIndirect diversification benefitsDiversification benefits provided by the multinational corporation that are not available to investors through their portfolio investment. International diversificationInternational diversificationThe attempt to reduce risk by investing in more than one nation. By diversifying across nations whose economic cycles are not perfectly correlated, investors can typically reduce the variability of their returns. Liquidity diversificationLiquidity diversificationInvesting in a variety of maturities to reduce the price risk to which holding long bonds exposes the investor. Further SuggestionsDiversification coneSector diversification Currency diversification Unique Diversification Benefit Efficient diversification Cone of diversification Principle of diversification |
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