What is a diversified portfolio

Diversification - auxmoney financial lexicon

The criteria for risk diversification

The diversification effect can only come into play if the portfolio has a certain structure. Arbitrary diversification can negatively affect the calculability of the portfolio under certain circumstances. As part of diversification strategies, risks are usually distributed among various risk carriers that hardly correlate with one another. The dependency of two assets is usually indicated with the so-called correlation coefficient. A correlation coefficient of 1 means that the assets are basically performing identically. In contrast, a correlation coefficient of -1 indicates that there is an opposite relationship. If the correlation coefficient is 0, no linear relationship is assumed.

In order to be able to better structure the dependency on individual assets in a portfolio, it is possible to set up so-called diversification criteria. Typical diversification criteria include, for example, countries, regions, cities and industries. Accordingly, as part of a diversification strategy, investments are made, for example, in stocks that come from different countries or regions and can be assigned to different industries. Direct or indirect real estate investments are often dealt with in a similar manner. Here, too, the assets can be allocated to properties in various countries, regions or cities. There is also the option of investing in both residential and commercial real estate at the same time in order to achieve diversification on several levels.