Definitions Diversification is the process or strategy whereby one allocates capital to various assets whose financial performance is, as far as possible, decoupled or unrelated to each other.
The Logic of of having a diverse portfolio:
The logic behind having a diverse portfolio of assets is clear. A negative performance for just one of these assets will lessen impact on your entire portfolio.
Warren Buffet doesn't operate a diverse portfolio himself.
Asset Type Diversification:
The financial performance of different asset types is usually different. For example, the bond market performs differently to the share market. For this reason, investors who wish to have a "diverse"portfolio will often hold various asset types.
Diversity within Asset Types:
The degree to which the financial performance of assets within each asset class are related to each other varies. For example the performance a "big oil" firm is likely to be more correlated with that of another "big oil" company than a consumer goods manufacturer.
