Markets · 6 pages · 12 min

How diversification is about what moves together

Diversification depends on holdings that do not all rise and fall for the same reason.

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From the opening

Diversification is the effect of combining holdings whose results do not move in lockstep, so that the particular shocks in one are partly offset by different shocks in another. The portfolio's ups and downs then depend on the shared moves, not on the full force of every individual swing. The opening covers offsets need different drivers, a long list can be one bet, and common shocks remain.

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Inside

Offsets need different drivers
A long list can be one bet
Common shocks remain
Correlation measures the link
Where the idea stops applying
A distinction worth keeping

Sources

Portfolio diversification
Covariance and correlation

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How diversification is about what moves together

From the opening

Inside

Sources

Also on the desk