Effect of portfolio diversification on risk?
This is a common question I see that I have seen answered in many different ways. The simple answer is it does decrease risk, but the amount of decrease varies. It should also be noted that when risk is decreased, return is also decreased. This phenomenon brings the sharp ratio into effect, but I digress, let's get back to the question at hand.
Diversification will lower the variance of your overall portfolio. This in essence is why your risk is reduced. The more investment vehicles you posses, the less likely all of them will crash at once.
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