49 Diversification

This video explores the powerful effect of diversification in N-stock portfolios. We delve into simplifying assumptions, such as equal weighting and consistent individual stock risks and correlations, to derive the portfolio's variance. The analysis reveals how increasing the number of stocks can significantly reduce risk by eliminating idiosyncratic components. This mathematical breakdown demonstrates how diversification minimizes individual stock volatility, leading to a portfolio variance that is often less than that of a single stock. We distinguish between diversifiable idiosyncratic risk and non-diversifiable systematic risk, illustrating how diversification has limits. The core message highlights that while diversification reduces specific company risks, market-wide risks remain. Visit AxiomTutoring.com and subscribe to @AxiomTutoringCourses.