What does diversification of a portfolio do to the distribution of the portfolio's return?

Question

What does diversification of a portfolio do to the distribution of the portfolio's return?

Answer 1

It lowers the standard deviation of returns (Volatility)

Answer 2

Lowers the volatility and produces a return somewhere in between the highest and lowest yielding asset in the portfolio.

Answer 3

In plain English, diversification is lowering risk and therefore limits how much you can lose in a stock portfolio. It also limits how much you can make. You wouldn't diversify just by picking more stocks. If you buy all energy stocks, you aren't really diversifying. Often in the markets stocks of similar types go the same direction. Financials are going down now along with retail. Energy and techs are going up. Next year it could be the opposite. That is why you diversify with different types of stocks, because you never really know what the market is going to do next.

Answer 4

Diversification is a sense of security in a portfolio. Since you are diversified, the chances of losing capital are diminished.

If you invest everything in one stock, the returns might be very very high, or very very low. Diversification takes those verys so your return is only high or low.

Answer 5

Simply spreads out your risk....in bear markets may temper your losses, but in bull markets also curtails your gains.

Diversity is the " safe" way to financial stabilty... concentration is the way to wealth.

( ...not necessarily a good outlook, but true.)

Average, diverse portfolios/funds are most likely down 15% in the last six months.... whereas a concentrated fund in " energy" would be up about 35/40.  ( ..or in ag/chems, or steel, or coal ...)

Answer 6

Diversification means having different kinds of investments, such as stocks, bonds, and mutual funds. It also means having a mix of investments in different sectors or industries. A well-diversified portfolio might include bonds, money market funds, and stocks of small, medium, and large companies in a variety of industries and countries. International stocks, for example, may rise at the same time domestic stocks are falling, softening the blow to your overall portfolio. Even if your risk tolerance is low, you can still consider diversifying into riskier investments as long as you keep the overall risk of your portfolio low.

Diversification is essential for successful investors who have multiple goals with different time horizons. For example, a 30-year-old unmarried investor is likely to need a different investment mix than a 50-year-old with two children heading off to college in the next few years. If you are retired, protecting your principal becomes increasingly important as opposed to growing your investments. An aggressive asset allocation is most suitable for investors with a long-term investment horizon (for example, 20 years or longer), who tolerate risk well, and whose primary goal is growing their investments. A moderate asset allocation is most suitable for investors with a medium-term investment horizon (for example, 10 years or longer), who tolerate risk moderately well, and whose primary investment goal is a moderate level of growth. A conservative asset allocation is most suitable for investors with a short-term investment horizon (for example, less than 10 years), whose risk tolerance is low, and whose primary investment goals are generating income and protecting against inflation.