Diversification and the benefit of diversification are measured differently Nike Air Foamposites. It pays to calculate the risk reduction obtained from diversification.
Measuring risk is necessaryBig movements in security prices are a primary risk faced by investors lebron basketball shoes . How much security prices rise and fall, and how quickly they do so-volatility, is how most financial professionals measure risk.
To assess risk in a portfolio, you also have to examine how the prices of different assets within the portfolio move together over time- their correlation- because portfolio risk depends on correlation Nike High Heel . Asset prices that move in tandem are said to be highly correlated.
When price fluctuations are relatively independent they lack correlation. There is less risk when the correlation among assets is low, and more risk when the correlation is high.When assets or asset classes have high correlation, they are being driven by the same underlying events, whether political, economic or of some other type. Securities with prices that move independently likely don't depend on the same events. You can ameliorate risk caused by events by investing in asset classes with low correlation. But if you don't measure correlation and use the result, you may end up with large percentages of your portfolio being impacted by the same event risks.The near financial collapse provides a notable exampleDuring the financial crisis, return correlations among most securities rose significantly. This happened because, in a rather complex way, the value of most securities became tied to a single event: the outcome of the real estate market. When the correlations across assets rose, the risk within 401K portfolios also rose, and when the markets ultimately dropped, investors found that their portfolios were not well protected by diversification.
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