What is Diversification?
Diversification is spreading your assets among multiple assets in order to reduce risk.
What is ‘Risk’?
Risk involves the chance an investment’s actual return will differ from the expected return. The “expected return” is the average of the annual returns over the lifetime of the investment. Risk is measured by calculating the standard deviation of the annual returns of an investment.
How Does Diversification Reduce Risk?
Hear what the “experts” have to say:
What is “Standard Deviation”?
The more an investment’s price varies from year to year, the greater the “risk” for the investor. In investing, this variation is calculated and expressed as the standard deviation of the investment.
The “standard deviation” is a mathematical calculation, the mechanics of which are beyond the scope of this presentation. Suffice it to say, an investment with a low standard deviation is considered less risky than an investment with a higher standard deviation.