The Reason for Diversification Is to Reduce the Risk (Variance)

question 105

Short Answer

The reason for diversification is to reduce the risk (variance).If the covariance is small (negative)then some portfolios have less variance than any individual securities in the portfolio.Think of the bathing suit and umbrellas company example in the Diversification video.

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Definitions:

Operating Cash Inflow

Cash generated from the core business operations of a company during a specific period.

Straight-Line Depreciation

An approach to evenly spread the expense of an asset over its period of utility.

Working Capital

The gap between a firm's present assets and liabilities, showing its operational efficiency and ability to cover short-term obligations.

Operating Cash Inflow

Cash generated from a company's normal business operations.