Talk:Diversification (finance)

Standard deviation table

Is there any relation to normality or the central limit theorem? --165.230.129.157 18:52, 20 November 2006 (UTC)

You're probably not checking this page at this point, but the relationship is clearest in the table at the end of the article. As the number of assets in a portfolio increases, the fluctuations of one have less effect on the overall mean. That's pretty much exactly the central limit theorem as I understood it. 218.225.111.205 (talk) 01:17, 18 March 2008 (UTC)

A relation yes, but dispersion is a parochial interpretation of diversification. Jd.gravity (talk) 05:12, 8 February 2017 (UTC)jd.gravity

Merge

I agree the articles should be merged. --SueHay 17:51, 30 March 2007 (UTC)

Merge completed

I took the liberty of merging the two articles together. Financial diversification now redirects to this article. I'm not an expert in finance, but I think I did a reasonable job on the merging.

Things that still need to be looked at:
1) the intro seems too long. Perhaps the strategies bit needs its own section.
2) in the previous article, there was a segment on super-diversification. This seemed like a personal plug more than an actual contribution to me, so I removed it. As defined previously, super-diversification is not different from horizontal or vertical diversification; it's simply more of the same. Additionally, the definition provided was crap, and not enough to let me understand anything about it except that it takes a lot of money.
3) more explanation on that final table would be nice. I understand what's going on, but don't have access to the textbook to add the explanatory information that table desperately needs.
218.225.111.205 (talk) 01:13, 18 March 2008 (UTC)

Re: "A chart comparing diversification to risk protection"

This chart is meaningless without some explanation. Do all the stocks have the same standard deviation? Are they assumed to be uncorrelated? In the second column heading, what is meant by "average standard deviation"?--what standard deviations are being averaged?-- or should it just say "standard deviation"? Duoduoduo (talk) 21:57, 15 May 2010 (UTC)

I've gone back to the original source to find the assumptions that lie behind the chart, and I've put the explanation in the article. Duoduoduo (talk) 18:09, 27 May 2010 (UTC)

Re: section "Types of diversification"

"Diversification can be segmented into systemic and non-systemic diversification." Without a definition of the terms systemic and non-systemic diversification, it's pointless to have them in here. I've never heard of these terms, and I wonder if there is confusion with the concepts of systematic (non-diversifiable) and non-systematic (diversifiable) risk. Please clarify!

"Relative diversification measurements compare the relationship of one asset to that of another asset." Again, this needs to be explained. Specifically how does this work? (And I suggest the better wording "Relative diversification measures the relation of one asset to another.")

"For holistic analysis and measurement one can see the IPC below." What does "the IPC" refer to-- is it the intra-portfolio correlation? If so, "IPC" should be replaced by "the intra-portfolio correlation (IPC)".

"Total diversification of a portfolio of assets can be measured by the portfolio dimensionality. Portfolio dimensionality accounts for both the systemic and non-systemic influences to the portfolio." This passage fails to define portfolio dimensionality, and it fails to explain how it accounts for those things.

"The more dimensions to the portfolio the more the portfolio is capable of performing in a simultaneous and independent manner." As far as I can discern, a portfolio "performing in a simultaneous and independent manner" has no meaning whatsoever: simultaneous with what? independent of what?

"The number of dimensions is also equal to the quantity of factors in the portfolio." What is meant by "factors" -- does it mean assets?-- or, does it mean underlying factors that drive the returns on the assets?

"The dimensionality measurement is currently patent pending. The inventors are Damschroder and Ladd and the patent is assigned to Gravity Investments." This appears to be nothing but an advertisement for somebody's patent application. Without any explanation of what is going on, and without any citations to the literature, this plug should not be here.

Can the author of this section clean it up along the lines suggested?Duoduoduo (talk) 22:35, 15 May 2010 (UTC)

Since this section was a complete mess as per the above, I've deleted it. Duoduoduo (talk) 18:09, 27 May 2010 (UTC)

i am the author of the above sections and will clean it up. Jd.gravity (talk) 03:03, 8 February 2017 (UTC)jd.gravity

I'm tempted to make major revisions on this page

Is there any objection? The article starts with one good example (eggs/baskets) but then gives an example of hedging (umbrellas/sunscreen) rather than diversification. It then lists four strategies. The first refers to "investment vehicles" and lists two vehicles and three asset classes; diversification among investment vehicles is not a core idea anyway, vehicles are generally chosen for cost, tax status, convenience and so forth. The second refers to "securities" and lists subsets of equities along with index funds. Since the index includes all the subsets, adding subsets reduces diversification. People invest in subsets to improve expected return at the expense of diversification. Three is the core idea, although it repeats the hedging example. Four refers to stratgies, which has the same issue as (2), investing in all possible active strategies recreates the index at greater cost.

The next section contradicts itself, first claiming that diversification reduces returns, then that it doesn't. Other than that it's unintelligible. —Preceding unsigned comment added by AaCBrown (talk • contribs) 14:03, 20 June 2010 (UTC)

Please go for it! This article has always bothered me. Last month I improved it by adding some math, deleting some nonsense, and explaining an unexplained chart from the literature. Today, in response to your comments above, I have rewritten the section on the effect on returns. When I get a chance I'll add some citations to the academic literature. I hope you will follow through on your temptation and make major revisions. Duoduoduo (talk) 15:08, 20 June 2010 (UTC)

Okay, I went for it. I hope you approve. —Preceding unsigned comment added by AaCBrown (talk • contribs) 21:55, 20 June 2010 (UTC)

Thanks -- looks nice! I've done a few minor touch-ups to it, and I'm going to restore some of my sentences that you deleted, primarily in the section "Return expectations while diversifying". It looks a lot better now. Incidentally, do you know whether the section "Intra-portfolio correlation" is correct? If so, can you provide a citation?

By the way, be sure to sign your posts by typing four tildes (~ in the upper left of the keyboard). Duoduoduo (talk) 22:47, 20 June 2010 (UTC)

Thanks, you were right to add it back and make the other fixes. No, the section on "intra-portfolio correlation" is not correct. The "Q" is just the weighted average pairwise correlation coefficient. It only makes sense if all the assets have the same standard deviation. It can't be -1 for more than two assets, in fact it cannot be less than the opposite of the sum of the weights squared. For most financial portfolios, with no more than 5% in any one asset, it cannot be significantly below zero. You don't need a -1 to eliminate diversifiable risk, you can eliminate diversifiable risk with any Q. And a correlation of zero does not imply independence. I'm going to take out and replace it with a short section diversifiable and non-diversifiable risk.AaCBrown (talk) 01:59, 21 June 2010 (UTC)

Very nice section on diversifiable and non-diversifiable risk. Incidentally, Wikipedia policy is to have only one link per word, the first time that word appears in the article--otherwise, the repeated color changes become distracting to the reader. I've removed the redundant links. Duoduoduo (talk) 14:29, 21 June 2010 (UTC)

Thanks for all the tips..AaCBrown (talk) 01:31, 22 June 2010 (UTC) 01:31, 22 June 2010 (UTC)

Examples/ Benefits of Geographic Diversification

Added a paragraph on the (expected) benefits of geographic diversification for global/institutional investors, with refs to recent research by European business schools (INSEAD Global Private Equity Initiative) and chartered financial analysts (the French Society of Financial Analysts (SFAF)- both using Asian assets as examples

Solferino (talk)

"$10,000 in one stock..."

"It is important to remember that diversification only works because investment in each individual asset is reduced. If someone starts with $10,000 in one stock and then puts $10,000 in another stock, they would have more risk, not less. Diversification would require the sale of $5,000 of the first stock to be put into the second. There would then be less risk."

This paragraph is incorrect: Both examples have the same risk because the portfolio is the same (50% in each stock), just that the first has twice as much capital. I notice Fama is referenced at the end of the paragraph, and I'm curious what he actually says regarding this. 14.201.69.118 (talk) 16:33, 10 March 2012 (UTC)

Bias and criticism

Pacerier (talk) 12:39, 2 March 2016 (UTC): ❝

I'd suggest we have a weighty section named "Criticism".

The article as it is now, unduly leans towards the implication of "diversification is ideal".

However, there are many criticisms of diversification in investing. (Ex google.com/search?q=warren+buffet+diversification. Could dig for more if time warrants.)

❞ lets add a section about the pitfall of diversification:

diversification costs more money to attain

....

i am also fond of saying Concentrate in control else diversify.

you may often see successful business owners shun diversification as exemplified by their own personal success. i would argue that as a business owner they have some material element of control and process manifestation abilities beyond investors who are participating in the capital markets. In the case of the later, diversification is always a beneficial strategy provided that they investor has not diversified into a lower returning assets, which is of course easy to do. Jd.gravity (talk) 03:02, 8 February 2017 (UTC)jd.gravity

Dr. Pozzolo's comment on this article

Dr. Pozzolo has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

The section on the amount of diversifiction is a bit weak. In most of the empirical literaure aggregate indices such as S&P 500 are used as a benchmark for the market portfolio. Many studies have also analysed the benefits of increasing diversification at the international level (see, e.g., Jorion, Journal of Business, 1985; Gerard and De Santis, Journal of Finance, 1997). References to some manuals such as Elton and Gruber or Fama may be helpful. Part of these issues are touched in the following sections, therefore some more attention to internal consistency may be sufficient.

the section on corporate diversification strategoes comes a bit from nowhere. At the beginnig it might be useful to stress that this is a different concept. references on geographical and operational diversification can be provided (e.g., Martin, J.D., Sayrak, A., 2003. Corporate diversification and shareholder value: A survey of recent literature. Journal of Corporate Finance 9 (1), 37-57.)

The order of the sections is a it messy: History may come better after examples, and Diversification with equally weighted portfolio after Effect of Diversification on vairance. Corporate diversification strategies might be last.

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Pozzolo has expertise on the topic of this article, since he has published relevant scholarly research:

• Reference : Mohamed Azzim Gulamhussen & Carlos Pinheiro & Alberto Franco Pozzolo, 2010. "Do multinational banks create or destroy economic value?," Mo.Fi.R. Working Papers 36, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

ExpertIdeasBot (talk) 20:21, 24 September 2016 (UTC)

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tautology in lead

A common path towards diversification is to reduce risk or volatility by investing in a variety of assets. Isn't this in fact the definition of diversification, not a type of diversification or "path towards" it?

Jokojis (talk) 00:31, 22 February 2024 (UTC)