DIVERSIFICATION

DIVERSIFICATION

‘A risk management technique that aims to reduce risk through mixing up your portfolio with many different investments’

Diversification is particularly helpful when trying to offset unsystematic risk, which is industry/company specific.

Diversification is based on the rationale that any bad performers should be offset by good performers thus smoothing out unsystematic risk.

The lower the correlation between investments in your portfolio, the lower the risk

Example of Correlation;

Gold and the US Dollar Gold is inversely correlated to the dollar meaning that the value of gold appreciates as the dollar weakens

Gold and Crude Oil Rising crude oil prices tend to lead to a rise in the value of gold as gold is often bought as a hedge against inflation