Why Does Diversification Reduce Risk

question 34

Essay

Why does diversification reduce risk?

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Definitions:

Categorical Variable

A type of variable that can take on one of a limited, and usually fixed, number of possible values, assigning each individual or other unit of observation into a particular group or nominal category.

Indicator Variables

Variables used in statistical models to represent categorical data with two possible values, typically 0 or 1, indicating absence or presence of a characteristic.

Regression Model

A statistical method used to model and analyze the relationships among variables and often used to predict values of a dependent variable based on values of independent variables.

Least-Squares Regression

A statistical method that finds the best-fitting line through a set of points by minimizing the sum of the squares of the vertical distances (residuals) of the points from the line.