🎯 Goal: Understand diversifying across assets/sectors lowers risk without giving up all expected return.
Diversification = not all eggs in one basket, spreading across assets and sectors that move differently. When one drops, others may offset → lower overall risk.
Let’s explore
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Spread across less-correlated assets/sectors → smoother overall swings.
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It cuts specific risk (one company), not overall market risk.
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Periodically rebalance to keep target proportions.
Practice activity
🧠 Why is holding 1 stock riskier than a fund of 50 stocks?
Worked example: Hold 1 stock: if that firm fails, you lose a lot. Hold a fund of 50 firms across sectors: one bad firm barely matters as 49 offset it → specific risk drops sharply.
Quick quiz
1. Diversification reduces?
→ Specific risk of one asset
2. Spread capital across assets that are?
→ Less correlated
3. Diversification does NOT remove?
→ Overall market risk
4. "Rebalancing" a portfolio to?
→ Keep target proportions
5. 1 stock vs a 50-stock fund?
→ Riskier
🎯 Real-life mission
Explain why holding one stock is riskier than a 50-stock fund.