Understanding the concept of advanced diversification

The podcast episode explores the concept of advanced diversification in investment portfolios. While diversification has been understood for centuries, modern portfolio theory has allowed for the quantification of its benefits. The research discussed in the episode breaks down diversification into three components: low correlation, low volatility, and negative correlation or hedging. It is found that the primary contributor to diversification benefits is low correlation, accounting for about 70%, followed by low volatility at 20%, and negative correlation at 10%. The research suggests that traditional 60-40 portfolios with equities and fixed income have worked well in the past but highlights the need to adapt to a changing environment.