Diversification - Financial definition

Diversification is a fundamental principle in investment management aimed at minimizing risk by allocating capital across a variety of assets that are not perfectly correlated. By spreading investments across different asset classes such as stocks, bonds, real estate, and commodities, as well as across various industries and geographic regions, investors can potentially reduce the impact of adverse events in any single investment or sector on the overall portfolio performance.

For example, a diversified portfolio may include a mix of domestic and international stocks, government and corporate bonds, and investments in both developed and emerging markets. Additionally, diversification can be achieved within asset classes by selecting securities with different risk-return profiles, maturities, credit qualities, and growth potentials. The goal of diversification is to achieve a balance between risk and return that aligns with an investor's financial objectives and risk tolerance.