Spreading exposure across assets, sectors, regions, or strategies to reduce dependence on any single outcome.
How it works
Diversification spreads exposure across return drivers so that one adverse outcome has less influence on the whole portfolio. Effective diversification considers underlying economic risks, not merely the number of holdings.
Example
Owning many technology stocks may still leave one concentrated sector exposure, while combining distinct asset and regional risks may broaden diversification.
Limitations
Correlations can rise during stress, and diversification cannot eliminate market-wide losses. Over-diversification may add complexity and cost without meaningful protection.
This definition explains Diversification accurately, with its practical use and material limitations.
Key assumptions
- The named calculation or convention is stated where definitions vary.
- The example is illustrative and not a forecast or recommendation.
What could invalidate the view
- A different market, instrument, jurisdiction, or methodology may use the term differently.
- The cited authority may revise its guidance or terminology.
- Editorial ownership
- Market Master · reviewed
- Approval state
- Reviewed financial content
- Evidence currency
- Current evidence window
- Source coverage
- 1 documented source