Managing Your Money 

How to diversify in a correlated world

How to diversify in a correlated world

Investors are always advised to have well-diversified portfolios, including different companies, sectors, geographies, currencies and asset classes. The aim is to reduce downside risk, so if one holding starts to lose value, other holdings either do not fall by the same amount as they are driven by different factors, or they even perform well. But the effectiveness of this diversification entirely depends on how closely correlated the holdings are to one another.

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