8.40What is portfolio diversification (in a fund)?
1What is it?
How spread out the fund’s holdings are: number of stocks, top-10 weight, sector weights.
2Why does it exist?
A fund with 60% in its top 10 stocks or 40% in one sector is more concentrated and riskier.
3Practical use
Also check overlap between your funds. Three large-cap funds may hold the same 30 stocks.
4Quick revision
- Check top-10 and sector concentration.
- Avoid overlapping funds.
5Knowledge check
Q1. What is portfolio overlap?Show answer
When different funds hold many of the same stocks.
Q2. High top-10 weight means?Show answer
More concentration risk.
Q3. Is owning 6 large-cap funds diversified?Show answer
Not really; high overlap.