Portfolio Diversification

Name:- Tanvi Naik

Roll no:- 34-2018
Meaning of Portfolio Diversification

 Portfolio Diversification is a foundational concept in investing.

 It can be a rather basic and easy to understand concept. However,
in its implementation, many investors make catastrophic mistakes
with too much concentration and others settle for average
performance because of over diversification.
 In finance and investment planning, portfolio diversification is
the risk management strategy of combining a variety of assets to
reduce the overall risk of an investment portfolio.
Purpose of Portfolio Diversification

 The purpose of portfolio diversification is portfolio risk

management. A risk management plan should include
diversification rules that are strictly followed.
 Portfolio diversification will lower the volatility of a portfolio
because not all asset categories, industries, or stocks move
together. Holding a variety of non-correlated assets can nearly
eliminate unsystematic risk (specific risk)
 In other words, by owning a large number of investments in
different industries and companies, industry and company
specific risk is minimized. This decreases the volatility of the
portfolio because different assets should be rising and falling at
different times; smoothing out the returns of the portfolio
 Portfolio optimization can be achieved through proper
diversification because the portfolio manager can invest in a
greater number of risk assets (i.e. stocks) without accepting more
risk than planned in the whole portfolio
Thank You