12.5What is portfolio diversification?
1What is it?
Diversification means spreading money across many stocks, sectors and asset types so one failure doesn’t sink you.
2Why does it exist?
"Don’t put all your eggs in one basket." Single companies can collapse; a diversified portfolio rarely does.
3Diagram
- Banking20%
- IT15%
- FMCG15%
- Energy15%
- Auto15%
- Others20%
4Risks
- Over-diversification (50 stocks you can’t track) dilutes returns.
- Diversification can’t remove market-wide risk.
5Quick revision
- Spread across stocks, sectors, assets.
- 10–20 stocks or a few funds is often enough.
- Doesn’t remove market risk.
6Knowledge check
Q1. What risk does diversification reduce?Show answer
Company- and sector-specific risk.
Q2. What risk remains?Show answer
Market (systematic) risk.
Q3. Is owning 5 bank stocks diversified?Show answer
No, all in one sector.
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