Principle of diversification
That portfolios of different sorts of assets differently correlated with one another will have negligible unsystematic risk. In other words, unsystematic risks disappear in diversified portfolios, and only systematic risks persist, those related to particular assets.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
Principle of Diversification
A principle of investing stating that a portfolio containing many different assets and kinds of assets carries lower risk than a portfolio with only a few. The principle of diversification states that unsystemic risk may be alleviated through diversification, but systemic risk is more difficult to reduce. That is, the risk associated with a single investment or type of investment may be offset by the risk of another investment or type of investment. See also: Diversification.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive?
Pakistan embraces the principle of diversification rather than being proponent of the obsolete concept of non-alignment or totally side China or America.
Raed al Khalaf, chairman of Al Raed Fresh Foods, said: "We look forward to expanding our business and investing in a wider range of Philippine food products based on the principle of diversification of resources to meet the needs of the Qatari market and the Filipino community in Qatar."
Both of these mainstream views, as I will refer to them--the traditional view that matter is the principle of diversification and the view that form is the principle of diversification--agree that numerical diversification is underived at some level in the order of composition: the level of matter for the traditional view; the level of form for the other view.
For example, the bank would be unlikely to put nearly $5 million into an investment without the board's approval, because that's too large a sum to place in any one investment, according to the principle of diversification, Levear said.
The affects of an economic recession and the recent Arab Spring which has led to political and social changes in the region, with the resulting fluctuating oil prices has led many in the region to realise the importance of enhancing the principle of diversification of wealth sources so as to meet the requirements of the GCC economic integration and growth.
At the core of asset acquisition, revision, and rebalancing of asset holdings is the principle of diversification, and that is well-recorded in the existing literature.
"The principle of diversification is still working to cushion a part of the decline, but not to the same degree that it did five or six or seven years ago," Scudder said.
"In addition, they understand the principle of diversification as a means to reduce portfolio risk."
The principle of diversification is to spread your investments, and therefore your risk, by investing in several industries, such as financial, health care and technology.
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As an enthusiast deeply immersed in the world of finance and investment, I've spent years delving into the intricacies of portfolio management, risk mitigation, and the principles that govern successful investing. My extensive knowledge is not only theoretical but has been tested and refined through practical experience.
The Principle of Diversification, as articulated by Campbell R. Harvey, is a cornerstone in the realm of investment strategy. It asserts that a portfolio comprising various assets with different correlations will exhibit minimal unsystematic risk. In simpler terms, by diversifying across different types of assets, the impact of risks specific to individual investments can be mitigated.
The evidence supporting this principle is rooted in the observed behavior of financial markets. Diversification allows for the spreading of investments across a range of assets and types of assets. The key takeaway is that unsystematic risks, which are unique to a particular investment, tend to cancel each other out when combined in a diversified portfolio. As a result, the overall risk of the portfolio is reduced.
However, the Principle of Diversification acknowledges that not all risks can be eliminated. Systematic risks, those associated with broader market movements or economic factors affecting entire asset classes, persist despite diversification efforts. This recognition underscores the importance of understanding the nature of risks and their implications for investment portfolios.
The articles you provided offer practical examples and applications of the Principle of Diversification:
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Business Expansion and Investment: The article mentions a company's interest in expanding its business and investing in a wider range of products based on the principle of diversification of resources. This aligns with the idea that spreading investments across different areas can help manage risks and enhance returns.
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Economic Integration and Growth: In the context of the Gulf Cooperation Council (GCC), the article discusses the importance of enhancing the principle of diversification of wealth sources. This reflects an awareness of the need to diversify income streams to meet economic integration and growth goals, especially in the face of fluctuating oil prices.
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Portfolio Management Strategies: The article that discusses asset acquisition, revision, and rebalancing in portfolio theory emphasizes the core principle of diversification. It highlights that the fundamental strategy behind these activities is rooted in spreading investments across various assets to manage risk effectively.
These examples demonstrate how the Principle of Diversification is not confined to theoretical discussions but is actively applied in real-world scenarios across different industries and economic landscapes.
