Diversification: Difference between revisions
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''Risk management.'' | 1. ''Risk management - investment.'' | ||
In investment, diversification is the process of spreading investment risk, to limit the possibility that an adverse event affecting a small number of investments could have an unacceptably detrimental effect on the overall portfolio. | |||
Often | Often summarised as 'Don't put all your eggs in the same basket'. | ||
In corporate finance the term is often used to mean the process of ensuring that an investment portfolio is constructed such that all possible specific risk (diversifiable risk) is eliminated. | In corporate finance, the term is often used to mean the process of ensuring that an investment portfolio is constructed such that all possible specific risk (diversifiable risk) is eliminated. | ||
Diversification is a form of risk reduction and hedging. | |||
However, some residual risks cannot be eliminated by diversification. | |||
2. ''Risk management - funding - liquidity - operational risk.'' | |||
More broadly, diversification can reduce risks in many other areas. | |||
For example, having a well diversified group of funders makes it less likely they will all withdraw funding at the same time. | |||
Similarly, having alternative - or multiple - operational service providers is another potentially beneficial example of diversification. | |||
== See also == | == See also == | ||
* [[Alternative Credit Council]] (ACC) | |||
* [[Asset allocation]] | |||
* [[Cash in the new post-crisis world]] | |||
* [[Concentration risk]] | |||
* [[Correlation]] | |||
* [[Credit risk diversification]] | |||
* [[Diversifiable risk]] | |||
* [[Diversity]] | |||
* [[Funding]] | |||
* [[Hedging]] | |||
* [[Liquidity]] | |||
* [[Market risk]] | |||
* [[Matching]] | |||
* [[Non-diversifiable risk]] | |||
* [[Portfolio]] | * [[Portfolio]] | ||
* [[Run]] | |||
* [[Specific risk]] | * [[Specific risk]] | ||
[[Category: | [[Category:Risk_frameworks]] | ||
Latest revision as of 03:57, 6 February 2024
1. Risk management - investment.
In investment, diversification is the process of spreading investment risk, to limit the possibility that an adverse event affecting a small number of investments could have an unacceptably detrimental effect on the overall portfolio.
Often summarised as 'Don't put all your eggs in the same basket'.
In corporate finance, the term is often used to mean the process of ensuring that an investment portfolio is constructed such that all possible specific risk (diversifiable risk) is eliminated.
Diversification is a form of risk reduction and hedging.
However, some residual risks cannot be eliminated by diversification.
2. Risk management - funding - liquidity - operational risk.
More broadly, diversification can reduce risks in many other areas.
For example, having a well diversified group of funders makes it less likely they will all withdraw funding at the same time.
Similarly, having alternative - or multiple - operational service providers is another potentially beneficial example of diversification.
