Glossary - Portfolio Diversification
Portfolio Diversification refers to the investment strategy that aims to maximize returns by investing in different areas that would each react differently to the same event. It is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique is that a portfolio constructed of different kinds of investments will, on average, yield higher long-term returns and lower the risk of any individual holding or security.
Also known as
- Risk Management
- Investment Diversification
Use cases examples
- Investment Policy Statement: The portfolio will be diversified across multiple asset classes including, but not limited to, equities, fixed income, and alternative investments to mitigate systemic risk.
- Venture Capital Investment Agreement: The fund agrees to adhere to principles of portfolio diversification, ensuring investments are spread across various sectors and stages to minimize specific risks.
Considerations for investors
- Investors need to balance the degree of diversification to avoid over-diversification, which can dilute potential returns.
- It's crucial to assess the correlation between assets to ensure true diversification and avoid concentrated risks in seemingly diverse investments.
Considerations for founders
- Diversification can reduce the risk of catastrophic losses by not putting all investment into one sector or stage of companies.
- Understanding the investor's diversification strategy can offer insights into their decision-making process and how they value different investments.
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