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Trading and Investment Terminology

Diversification

Diversification is a risk management technique that blends a wide assortment of investments inside a portfolio.

A diversified portfolio contains a blend of distinct resource types and investment vehicles in an attempt at constraining exposure to any single resource or risk.

The reason behind this method is that a portfolio created of assorted types of resources will, on average, yield higher long haul returns and lower the danger of any individual security.

 

Diversification endeavors to smooth out unsystematic risk occasions in a portfolio, so the positive performance of some investments balances the negative performance of others.

 

The advantages of diversification hold only if the stocks in the portfolio are not splendidly correlated i.e., they react differently, often in contradicting ways, to market influences.

 

Studies and mathematical models have indicated that keeping up a well-diversified portfolio of 25 to 30 securities gives the most cost-effective level of risk reduction.

 

The investing in more stocks results in further diversification advantages, yet at a drastically smaller rate.

 

The benefits of diversification are many. However, there are downsides, as well.

 

The more stocks a portfolio has, the more tedious and more costly, it can be to manage, since purchasing and selling many different stocks causes more transaction and brokerage fees.

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