Define diversification as a strategy and what are its motives, and describe different types.
Diversification, as a strategy, refers to the practice of spreading investments across a variety of assets to reduce risk. The primary motive behind diversification is to minimize potential losses by investing in different sectors or industries. By diversifying a portfolio, investors aim to protect themselves against market fluctuations and unforeseen events that may impact a particular asset class.
There are several types of diversification strategies that investors can employ, including asset allocation diversification, geographic diversification, and sector diversification. Asset allocation diversification involves investing in a mix of asset classes such as stocks, bonds, and real estate. Geographic diversification entails investing in assets across different regions or countries to reduce exposure to country-specific risks. Sector diversification involves investing in various industry sectors to spread risk across different parts of the economy.
Overall, diversification is a fundamental strategy that can help investors manage risk and optimize returns in their investment portfolios.