A portfolio that includes a variety of securities so that the weight of any security is small. The risk of a well-diversified portfolio closely approximates the systematic risk of the overall market, and the unsystematic risk of each security has been diversified out of the portfolio.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
A portfolio that has invested in many different types of security in order to hedge against the securities already in the portfolio. Ideally, this reduces the risk inherent in any one investment, and increases the possibility of making a profit, or at least avoiding a loss. This may also reduce the expected return on the fund, but it depends on level and type of diversification. There are two main types of diversification that a well-diversified portfolio may utilize. Horizontal diversification involves investing in similar types of investments. Examples include investing in several technology companies or in different types of bonds. 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. Both types of diversification may be as broad or narrow as the fund's manager chooses. In general, the broader the diversification, the less risk and less return.
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