Diversified investments refer to diversifying investment portfolios.
This can be done, for example, through investing in funds that invest the money in various financial assets, or you can diversify the investments yourself.
Portfolio diversification is an important way to reduce the risk of investing. Through diversification, the eggs, so to speak, are not all in the same basket.
The theory has its roots on modern portfolio theory, developed by Harry M. Markowitz.
His theory is about the optimal portfolio selection with trade-offs between risk and return, using portfolio diversification as a method of reducing risk.
Resources to Learn About Diversified Investments
You can learn a lot about optimal portfolios (those that provide the greatest expected return for a given level of risk) by studying the different finance theories about optimal portfolio allocation.
These theories include:
- Modern Portfolio Theory (Markowitz)
- Capital Asset Pricing Model (Sharpe, Lintner)
- Arbitrage Pricing Theory (Ross)
Books that deal about these and other theories of portfolio selection include:
- Portfolio Selection: Efficient Diversification of Investments by Harry M. Markowitz
- Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation by Richard O. Michaud
- Modern Portfolio Theory and Investment Analysis by Edwin J. Elton, Martin J. Gruber, Stephen J. Brown, William N. Goetzmann
- Portfolio Theory and Capital Markets by William F. Sharpe
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