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In finance, diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets.
Specific risk is the risk associated with individual assets - within a portfolio these risks can be reduced through diversification (specific risks "cancel out"). Specific risk is also called diversifiable, unique, unsystematic, or idiosyncratic risk.
In other words, while diversification can reduce risk, it can also limit reward. If you invest in 100 different stocks, only a small portion of your portfolio might benefit from a major win, while ...
Risk premium is the product of the market price of risk and the quantity of risk, and the risk is the standard deviation of the portfolio. The CML equation is : R P = I RF + (R M – I RF)σ P /σ M. where, R P = expected return of portfolio I RF = risk-free rate of interest R M = return on the market portfolio σ M = standard deviation of the ...
“So [the investment] gave you diversification. It gave you a return. It will continue to go up, continue to go down, is paying you a nice dividend,” Orman said in a podcast episode. “And so ...
4. Adjust your asset allocation and get diversified. Asset allocation is the process of dividing your investments into different buckets, depending on their potential return, their risk and your ...
When a low-risk investment is made, the return is also generally low. Similarly, high risk comes with a chance of high losses. Investors, particularly novices, are often advised to diversify their portfolio. Diversification has the statistical effect of reducing overall risk.
Exchange-traded funds (ETFs) are excellent passive investment vehicles. They hold baskets of stocks or other investments, which helps provide diversification and reduce risk. Because of that, you ...