Diversification

Modern Portfolio Theory

Diversification

Modern Portfolio Theory

Diversification

Diversification

An investor can reduce portfolio risk simply by holding combinations of instruments that are not perfectly positively correlated. If all the asset pairs have correlations of 0—they are perfectly uncorrelated—the portfolio’s return variance is the sum over all assets of the square of the fraction held in the asset times the asset’s return variance (and the portfolio standard deviation is the square root of this sum).

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