Diversification Theory
Nick Name
Diversification
- Diversification involves investing in investments (or asset classes) that aren't tightly correlated
- Returns of a diversified portfolio are usually great than those of a concentrated portfolio
- Risks (volatility) of a diversified portfolio is usually less than those of a concentrated portfolio
- A diversified portfolio tends to give a higher level of return for the same amount of risk as an undiversified portfolio
- Diversification is a critical component of risk management
- Diversification minimizes permanent losses of capital, decreased portfolio income during recessions, and helps to avoiding low long-term returns.
- Diversification goes beyond the # of companies you own. It also includes diversifying by sector, industry style and asset class.