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Diversification

When portfolio managers talk about diversification they are describing holding assets that are not correlated with each other (i.e. their values do not move in tandem). As an example, a portfolio entirely full of shares in oil companies is not very diversified (and so is risky because something might happen that makes the whole portfolio fall in value, like a collapse in the oil price) but adding a technology company to the portfolio increases its diversification. The more different sorts of assets you add the more diversified the portfolio becomes and the less risky it is. But a portfolio that is too diversified will just perform like an index.

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