Magic of diversification
The effective reduction of risk (variance) of a portfolio, achieved without reduction to expected returns through the combination of assets with low or negative correlations (covariances). |
Similar financial terms
DiversificationThe holding of assets whose returns are not perfectly correlated
Principal of diversification
Highly diversified portfolios will have negligible unsystematic risk. In other words, unsystematic risks disappear in portfolios, and only systematic risks survive.
Naive diversification
A strategy whereby an investor simply invests in a number of different assets and hopes that the variance of the expected return on the portfolio is lowered.
Markowitz diversification
A strategy that seeks to combine assets a portfolio with returns that are less than perfectly positively correlated, in an effort to lower portfolio risk (variance) without sacrificing return.
Liquidity diversification
Investing in a variety of maturities to reduce the price risk to which holding long bonds exposes the investor.
