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Diversification is a portfolio strategy designed to reduce
exposure to risk by combining a variety of investments, such as
stocks, bonds, and real estate, which are unlikely to all move in
the same direction.
The goal of
diversification is to reduce the risk in a portfolio by investing
in different asset classes that have a low degree of correlation
with each other. With proper diversification volatility is
reduced by the fact that not all asset classes, industries or
individual companies move up and down in value at the same time or
at the same rate.
Diversification
reduces both the upside and downside potential of a portfolio, but
allows for more consistent performance under a wide range of
economic conditions. |
"In constructing optimal portfolios we find that sectors offer
higher potential returns and lower correlations compared to
standard equity breakouts based on market capitalization or
investment styles" |
