Diversification

Diversification is a risk management technique that provides insurance against the unexpected. The rule of thumb for diversification is to combine investments which have low or negative correlations to eliminate specific risk in a portfolio until only market risk remains.

When only market risk remains in a portfolio, options and futures can be used to hedge these risks.

Diversification has an effect upon portfolio return. Diversification reduces risk but it also reduces a portfolio's maximum return. Diversification lessens the pressure to sell a particular holding and therefore, diversification increases trading flexibility by extending the investors time horizon.

In the strategic approach to portfolio management there may be several levels of diversification.

1) how should the portfolio be apportioned between asset classes? Diversify by asset class.

2) how should the portfolio be divided within each asset class? Diversify within each asset class.

3) what percentage of the portfolio should be invested outside of Canada? Diversify geographically.

The world of investment has emerged as an important cornerstone in planning and organizing our financial resources. Regulations and securities law are available in Canada to protect investors and to provide them with a level of confidence in their dealings with the domestic markets. A number of federal and provincial laws regulate the activities and actions of participants in the securities markets.