Diversification
Version 1.0.0 · Updated 2026-07-28
CORE DEFINITION
Allocating capital across asset classes with low correlation to one another (such as stocks, bonds, real estate, and gold) in order to reduce the overall volatility risk of the portfolio. "Do not put all your eggs in one basket." Scaffold role: the only free lunch. In finance this is the sole method that lowers risk without reducing expected return. It reminds us that correlation risk must be taken seriously in personal asset allocation.
SCAFFOLDING EFFECT
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- Free lunch: this is the only method that lowers risk without lowering expected return. - Check correlation first: diversification only works when the assets are not highly correlated. - Spread across asset classes: combine holdings that do not move together instead of betting on one.
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Modern portfolio theory (Markowitz, 1952). When asset returns are not perfectly correlated, the portfolio variance is less than the weighted average of the variances of individual assets, thus reducing risk without lowering (or even increasing) expected returns. The mechanism is "correlation hedging"—the probability of different assets crashing simultaneously is lower than that of a single asset.
MINIMUM ACTION
In progress 0/4Practice this model in one real situation:
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Diversificationverified
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