Portfolio diversification strategies are essential techniques used by investors to reduce risk and enhance potential returns. The primary goal of diversification is to spread investments across various asset classes, such as stocks, bonds, and real estate, to minimize the impact of any single asset's poor performance on the overall portfolio. By holding a mix of assets that are not strongly correlated, investors can achieve a more stable return profile.
Key strategies include:
In mathematical terms, the expected return of a diversified portfolio can be represented as:
where is the expected return of the portfolio, is the weight of each asset in the portfolio, and is the expected return of each asset. By carefully implementing these strategies, investors can effectively manage risk while aiming for their desired returns.
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