The Synopsis

Article. The Investment Matching Principle: How the Risk/ Return Profile Connects to Diversification

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Mar 29, 2024
Explore the connection between risk-return profile and diversification in financial instruments, analyzing bond portfolios and diversification strategies. Understand diversification in investments, common risks, and effective risk mitigation. Learn about balancing risk profiles and diversification in investing strategies with examples from real-world scenarios.
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INSIGHT

Match Risk with Diversification

  • Investment wisdom lies in matching risk and diversification, not in the instrument type alone.
  • Diverse, independent investments reduce the risk of catastrophic losses over time.
ANECDOTE

False Diversification Example

  • Owning many Gulf Coast energy bonds seemed diversified but shared a common oil price risk.
  • This shows how shared risks undermine apparent diversification.
INSIGHT

Rare True Uncorrelation

  • Conjunctive probabilities illustrate why independent risks reduce simultaneous failures.
  • True independence among investments is rare, so diversification must focus on shared risks.
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