Diversification

Abstract Diversification involves spreading investments among various assets in order to improve portfolio performance in some manner. Mathematical analysis of portfolio diversification was introduced in 1952 by Markowitz with his concept of mean/variance portfolio efficiency. A portfolio was called efficient if among all portfolios of the same assets, the portfolio had minimum variance for a given expected rate of return. Hence, in the setting of expected portfolio return and variance, portfolio diversification served to control the risk of a portfolio. In 1982, Fernholz and Shay showed that if the expected compound growth rate of a portfolio is considered rather than the expected rate of return, then portfolio diversification can increase the expected growth rate as well as control risk.