Saturday, December 25, 2010


Diversification refers to a strategy which aims to reduce risk by holding a small amount of a large number of assets (i.e. if one asset goes bad then the overall impact wont be as noticeable). Diversification can be as simple as holding a wider range of assets or a higher number of shares or bonds; or as sophisticated as an advanced multi-asset mean-variance optimisation exercise (see modern portfolio theory and portfolio optimisation). More scientific diversification strategies will analyse correlations, and aim to put together a portfolio of assets that tend on average not to move in the same direction (i.e. low or even negative correlations). Diversification is a key rationale for investing in managed funds, e.g. large bond funds, equity funds, and particularly balanced funds which hold a variety of asset classes.

Synonyms: Risk spreading, Risk optimisation, Risk and return, Efficient portfolio, Mean-variance optimisation
If you have any questions, or disagree with the definition, or if you have anything to add then please do add your comments in the box below.

No comments:

Post a Comment