Question

What would the most fully diversified portfolio look like?

Imagine a portfolio that is diversified. NO, more diversified than that.

Okay, NO, more diversified still!

Until you have reached the most fully diversified portfolio of which you can conceive. Describe it: What is in it? What is not?

Answer 1

The fully diverisfied portfolio is the portfolio where only systematic risk exist and all the non systematic risks are removed.

Diversification can happen among a single asset as well as group of asset .

Suppose in a portfolio consisting of a single asset lets say equity if one invests in IT stocks and the stocks which is backed by gold lets say gold loan companies, then with the rise boom in economy IT stocks will increase but gold stocks may or may not increase and when the economy is in downturn gold backed security may increase as it is considered as safe compensating the downward momemt in IT stocks , here the main idea is to select the stocks whose correlation is negative or less then 0.5. Hence in this situation your portfolio will be fully diversified

Now lets say if we are investing in different assets and we want to fully diversify it then one can have portion of their holding in stocks , bonds , realestate and gold during the period of boom bonds and gold wont give much return but stocks and real estate will while during the slowdown bonds and gold safer entities will give good returns and cap our down side risk.

One can also reduce the country risk , currency risk by investing in markets of different countries.