Meaning of magic of diversification | Babel Free

Definitions

The effective reduction of risk of a portfolio, achieved without reduction to expected returns through the combination of assets with low or negative correlations.

uncountable

Examples

“One reason why banks engage in securitization is to spread around risk like jelly on toast. Instead of lumping the jelly on one small piece of the toast, leaving all the reward (or risk that it falls off the toast) for one bite, it's evenly distributed, making for lots more tasty bites—and, through the quant magic of diversification (spreading the jelly), less risk.”

CEFR level