What is diversification & how does it work?

What is Diversification? Diversification is a technique of allocating portfolio resources or capital to a mix of different investments. The ultimate goal of diversification is to reduce the volatility of the portfolio by offsetting losses in one asset class with gains in another asset class.

What is a diversified portfolio?

Diversification is a risk management strategy that creates a mix of various investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt to limit exposure to any single asset or risk .

Does diversification affect risk?

However, diversification does not usually affect the inherent or systematic risk that applies to the financial markets as a whole. One way to think about the two basic types of risk is that one refers to the specific risks of an industry or individual firm, while the other refers to risk factors in the overall economy.

What is Unrelated Diversification?

Unrelated diversification exists whereby firm ventures into an industry that does not bear any significant resemblance to the existing firm`s industry. This strategy can assist business owners in balancing their cash flows, for instance, during the seasonal downturn.