Are certain types of risk avoidable?
Yes. There are two types of risk: unavoidable and avoidable risk, or non-diversifiable and diversifiable risk. Academics refer to these as systematic and non-systematic risk. Certain risks are implicit in the capital markets because of the volatility associated with macro factors such as the global economy or the demand for equities and bonds. These risks must be borne by all investors and cannot be diversified away. However, many investors also bear a large amount of avoidable risk by betting on one country, one class of stock, or even a single stock. Comprehensive Diversification eliminates this diversifiable risk and reduces future uncertainty by spreading investments among many different and relatively uncorrelated asset classes. By diversifying among multiple asset classes as well as within each asset class, an investor will be exposed only to those particular risk factors that are absolutely necessary. • If I already own fifty stocks, why do I need more diversification? Diversifi
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