Diversification

Diversification is an in investment concept of spreading the risk by investing in a variety of assets. From risk management perspective, investing in one (or few) very profitable assets carries a risk of a huge loss if they were to suffer an unexpected loss. Investing in a greater number of varied (diversified) instruments reduces that risk, because it is much less probable for all those investments to generate a loss at the same period in time. Diversification is a clear trade-off between risk and return, because increasing the number of holdings, while reducing the risk, also lowers their return, bringing it asymptotically closer to overall market return.

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