Vertical Diversification

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Vertical Diversification

In risk management, the act or strategy of adding very different investments to one's portfolio to hedge against the investments already in it. Ideally, this reduces the risk inherent in any one investment, and increases the possibility of making a profit, or at least avoiding a loss. Vertical diversification involves investing in very different securities; for example, one may choose to invest in securities traded in different countries, or in both winter clothing and swimsuit companies. Vertical diversification may be as broad or as narrow as the investor chooses. In general, broader diversification equates to less risk and lower return. See also: Markowitz Portfolio Theory, Horizontal diversification.