Risk Diversification
Risk diversification is an investment strategy that involves spreading investments across various asset classes, industries, or geographical regions to reduce exposure to any single source of risk. By diversifying, investors can mitigate the impact of poor performance in one area on their overall portfolio. Diversification reduces the overall risk profile and helps achieve more stable returns, as losses in one asset or sector may be offset by gains in others.
Example
An investor diversifies their portfolio by holding a mix of stocks, bonds, real estate, and international assets, reducing the impact of a downturn in any single market.
Key points
• A strategy to reduce risk by spreading investments across different asset classes or sectors.
• Helps mitigate the impact of poor performance in any one area.
• Aims for more stable and balanced portfolio returns.
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