Diversification in finance involves spreading investments around into many types of investments, including stocks, mutual funds, bonds, and cash. Money can also be diversified into different mutual fund investment strategies, including growth funds, balanced funds, index funds, small cap, large cap, and sector-specific funds. Geographic diversification involves a mixture of domestic and international investments. Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... Investment is a term with several closely related meanings in finance and economics. ... It has been suggested that shareholder be merged into this article or section. ... A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities. ... In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... Cash usually refers to money in the form of liquid currency, such as banknotes or coins. ... Small-cap refers to stocks that have a small market capitalization. ... Large-cap refers to stocks that have a large market capitalization. ... Physical map of the Earth (Medium) (Large 2 MB) Geography is the scientific study of the locational and spatial variation in both physical and human phenomena on Earth. ...

Diversification reduces the risk of a portfolio. It does not necessarily reduce the returns. This is why diversification is referred to as the only free lunch in finance. In finance, a portfolio is a collection of investments held by an institution or a private individual. ... TANSTAAFL is an acronym for the adage There Aint No Such Thing As A Free Lunch, popularized by science fiction writer Robert A. Heinlein and promulgated in his 1966 novel The Moon Is a Harsh Mistress, which deals with a libertarian utopia. ...

Diversification can be quantified as the intra-portfolio correlation. This is a statistical measurement from negative one to one that measures the degree to which the various assets in a portfolio can be expected to perform in a similar fashion or not. In business and accounting an asset is anything owned which can produce future economic benefit, whether in possession or by right to take possession, by a person or a group acting together, e. ...

Portfolio balance occurs as the sum of all intra-portfolio correlations approaches negative one. Diversification is thus defined as the intra-portfolio correlation or, more specifically, the weighted average intra-portfolio correlation. Maximum diversification occurs when the intra-portfolio correlation is minimized. Intra-portfolio correlation may be an effective risk management measurement. The computation may be expressed as:

Where Q is the intra-portfolio correlation, X_i is the fraction invested in asset i, X_j is the fraction invested in asset j, P_ij is the correlation between assets i and j, and n is the number of different assets.

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See also

• Modern portfolio theory
• Central limit theorem
• List of finance topics

Capital Market Line Modern portfolio theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. ... A central limit theorem is any of a set of weak-convergence results in probability theory. ... What follows is a list of over 250 Wikipedia articles on finance topics. ...

References