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Efficient diversification |
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Efficient diversificationThe organizing principle of modern portfolio theory, which maintains that any risk-averse investor will search for the highest expected return for any particular level of portfolio risk.Efficient diversification Similar MatchesDiversificationDiversificationInvestment 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'. Sector diversificationSector diversificationConstituting of a portfolio of stocks of companies in each major industry group. Cone of diversificationCone of diversificationSee diversification cone. 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. Unique Diversification BenefitUnique Diversification BenefitReduction in the likelihood of financial distress for a conglomerate firm that comes with its diversified investments. Further SuggestionsCurrency diversificationPrinciple of diversification Markowitz diversification Indirect diversification benefits Naive diversification Diversification Diversification cone Liquidity diversification |
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