Diversification

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  • The application of techniques used to manage or reduce the risks of a broad range of investments exposed to uncertainties from the external and internal environments. The external environment includes, but is not limited to, the stock market, the economy, government policies, interest rates, and currency fluctuations. The internal environment is specifically related to individual firms.

    An application of diversification is in stock portfolio management. An investor can reduce his or her portfolio risks by holding a portfolio of stocks above 25. This means that holding more stocks in a portfolio can spread the risk among a larger diversified base. However, these stocks in the portfolio must be diversified across many industries to ensure that if one industry is in recession, other industries are in boom. ...

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