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:

Olfactory Cells

Specialized neurons in the nasal cavity that are responsible for the sense of smell.

Pheromones

Chemical substances produced and released into the environment by an animal, affecting the behavior or physiology of others of its species.

Extrinsic Eye Muscles

The six muscles that control the movement of the eye and the eyelid, allowing for complex movements and adjustments in vision.

Ciliary Muscle Activity

The contraction and relaxation of the ciliary muscle, which helps in controlling the lens shape for focusing on objects at varying distances.