Principle of diversification


 

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Principle of diversification

That 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.



Principle of diversification

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Efficient diversification

Efficient diversification

The 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.


International diversification

International diversification

The 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.


Diversification cone

Diversification cone

For given prices in the Heckscher-Ohlin Model, a set of factor endowment combinations that are consistent with producing the same set of goods and having the same factor prices. Such a set has the form of a cone.


Naive diversification

Naive diversification

A 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.


Liquidity diversification

Liquidity diversification

Investing in a variety of maturities to reduce the price risk to which holding long bonds exposes the investor.


Further Suggestions

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Indirect diversification benefits
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Cone of diversification


 
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