REDUCTION OF RISK THROUGH PORTFOLIO DIVERSIFICATION

Abstract

Diversification can be understood by multiple investors as the basic tool behind making financial gains in the financial markets of today. The rationale behind diversification is that firms from the same industry tend to perform poorly at the same time compared to firms that are not from the same industry. In the current market investors are seen to replicate that market portfolio to try and gain from the maximum amount of gains achievable. By theory the portfolio diversification practice can yield returns that are prone to the negativity of the financial world. “Don’t put all your eggs in one basket,” simply means that investors should hold assets that are diversified into various asset classes and countries (Markowitz H. , 1952).