Diversification Theory

Nick Name
Diversification Theory refers to portfolio diversification that tackles the fundamental concept in investing. A form of a risk management strategy, it combines a variety of assets to reduce the overall risk of an investment portfolio, while lowering the volatility by holding non-correlated assets to eliminate unsystematic risk. It is an investing technique used by allocating portfolio resources or capital to a mix of different investments, unequally affected by specific market volatility, to possibly offset losses in one asset class with gains in another asset class. This theory remains an often employed tool by investors worldwide to strategize their investment allocations. Factors to consider include types of investments, risk levels, industries, and foreign markets. Nowadays, index and mutual funds, as well as ETFs, provide individual investors with a simple and inexpensive instrument for creating a diversified investment portfolio.