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Lesson · Finance Academy · Advanced

Diversification

Correlation, systematic and specific risk, rebalancing.

Diversification is spreading capital across different assets so that the result does not depend on one.

Assets with low correlation help most. Many similar assets that move together make weak diversification.

Diversification reduces the specific risk of an individual company but does not remove the systematic risk of the whole market. Rebalancing brings the portfolio’s shares back to their targets.