Lesson 4: Diversification


“Don’t put all your eggs in one basket”

-An interpretation of a line in Don Quixote

So we know that given a return we don’t want to take on any more risk unless we have the possibility of more gain. Great! How do we minimize the risk we already have?  As the cliché phrase above hints at one way commonly used to manage risk is the practice of diversification.  Let’s start by defining it.

Key Points

  • Diversification is an essential aspect of any investment strategy
  • Diversification decreases risk of a portfolio by decreasing volatility of the entire portfolio
  • Diversification is useful up to a point, but exhibits diminishing marginal returns

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Lesson 3: Risk and Return

It has been in my learning experience that there is no one definition of the word risk. There are many variations on the concept and many ways to view it.

Risk in my opinion could best be described as “uncertainty of results due to the inherent unpredictable nature of the future”. To put risk differently if you had psychic powers and could accurately see what the future held you would have no risk in your life as there would be no uncertainty to outcomes.

 Key Points

  • Risk is the chance that your expectations concerning a return are not what actually occurs
  • There is a fundamental relationship between risk and return of an investment

Continue reading Lesson 3: Risk and Return