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Diversification definition

Diversification is about improving the reward-to-risk ratio. Decreasing the denominator improves the ratio.


Diversification is the concept of lowered risk when securities are held in a portfolio. Securities with low correlation, or co-movements, offer greater diversification benefits. The quantification of this lowered risk can be forecast by using portfolio weights and the risk measures found in a covariance matrix.

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Two sectors offering diversification include healthcare and industrials because of their high correlation. | True or False?

False. The first part is true, the second is false

In a Sentence

Guy:  How do you measure diversification  when executing your daily trade lists?
Rex:  By instinct. How much did you spend at lunch today Guy? $6.73 or $6.74?


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~/ home  / finance  / glossary  / diversification

lower risk
low correlation
covariance matrix
modern portfolio theory