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Risk management.

Diversification is the process of spreading 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.

See also