Diversification (finance)
In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of its constituent. Therefore, any risk-averse investor will diversify to at least some extent, with more risk-averse investors diversifying more completely than less risk-averse investors.
Diversification is one of two general techniques for reducing investment risk. The other is hedging. Diversification relies on the lack of a tight positive relationship among the assets' returns, and works even when correlations are near zero or somewhat positive. Hedging relies on negative correlation among assets, or shorting assets with positive correlation.
Read more about Diversification (finance): Return Expectations While Diversifying, Maximum Diversification, Effect of Diversification On Variance, Diversifiable and Non-diversifiable Risk, An Empirical Example Relating Diversification To Risk Reduction, Corporate Diversification Strategies, History, Diversification With An Equally-weighted Portfolio, Cointegration and Correlation in Finance