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Sector diversification |
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Sector diversificationConstituting of a portfolio of stocks of companies in each major industry group.Sector 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'. 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. Currency diversificationCurrency diversificationUsing more than one currency as an investing or financing strategy. Exposure to a diversified currency portfolio typically entails less exchange rate risk than if all the portfolio exposure were in a single foreign currency. Liquidity diversificationLiquidity diversificationInvesting in a variety of maturities to reduce the price risk to which holding long bonds exposes the investor. Further SuggestionsInternational diversificationIndirect diversification benefits Unique Diversification Benefit Naive diversification Markowitz diversification Diversification Efficient diversification Diversification cone |
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