What is Diversification?
A risk management technique that includes a variety of investments within a portfolio. The theory behind this technique is that a portfolio of different kinds of investments will, on average, yield higher returns and will experience lower volatility than any individual investment found within a portfolio. Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. The benefits of diversification will hold only if the securities in a portfolio are not perfectly correlated. However asset correlation can vary overtime and assets classes that appear to be uncorrelated can become correlated.