ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Diversification is a strategy that mixes a wide variety of investments within a portfolio in an attempt to reduce portfolio risk. Diversification is most often done by investing in different asset classes such as stocks, bonds, real estate, or cryptocurrency.

Detailed explanation-2: -Diversification involves spreading your investment dollars among different types of assets to help temper market volatility. As a simple example, all equity (or stock) investments and most fixed income (or bond) investments are subject to market fluctuation.

Detailed explanation-3: -While diversification can reduce risk, it can’t eliminate all risk. Diversification reduces asset-specific risk – that is, the risk of owning too much of one stock (such as Amazon) or stocks in general, relative to other investments.

Detailed explanation-4: -By spreading your investments across different assets, you’re less likely to have your portfolio wiped out due to one negative event impacting that single holding.

Detailed explanation-5: -Unsystematic risk can be mitigated through diversification, and so is also known as diversifiable risk. Once diversified, investors are still subject to market-wide systematic risk. Total risk is unsystematic risk plus systematic risk.