Question

Explain diversification and benefit of a diversified portfolio.

Answer 1

Diversification means to invest in different asset classes
so that you don't put all your eggs in one basket.
For example, if you want to diversify by investing in different
types of assets you can choose from the following assets classes.
1) Real Estate
2) Fixed income
3) Stocks
4) International stocks
Real estate consists of assets that are invested in real estate.
Fixed income are investments like bonds and treasury securities.
Stock consist of small cap, mid cap, and large cap stocks for example.
International stocks can be developed markets or emerging market stocks.
Diversification helps you spread your risk among different
asset classes. If one asset class performs badly by giving a negative return
the other might perform well by giving a positive return. Therefore, the overall
return of your portfolio will be sheltered from the volatility of the financial
markets. In other words, diversification helps you reduce the risk of your portfolio.
Diversification allows you to have exposure to different assets classes
so that shelters you from a downturn in any one sector of the market.