diversification
Diversification
Purpose
Provides the mathematical foundations and practical frameworks for building diversified portfolios. Covers portfolio variance, correlation effects, the efficient frontier, minimum variance portfolios, risk contributions, and factor-based diversification. Explains why diversification reduces risk and where it fails.
Layer
4 — Portfolio Construction
Direction
both
When to Use
- Understanding why and how diversification reduces portfolio risk
- Computing portfolio variance and volatility for multi-asset portfolios
- Constructing the efficient frontier or minimum variance portfolio
- Analyzing risk contributions and diversification ratios
- Evaluating whether a portfolio is truly diversified across risk factors
- Assessing correlation stability and regime-dependent behavior
- Determining how many assets are needed for adequate diversification
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