Portfolio Theory - Part 3 (Diversification)

ZACH DE GREGORIO, CPA

This video continues the discussion of Portfolio Theory, but focuses on explaining the definition of Diversification. Diversification is combining investments with negative correlations to reduce portfolio risk. Correlations is a statistics term to describe the relationship between the movements of two investments. Correlations fall on a scale from 1 to -1. Positive numbers represent positive correlations (two investments that tend to move in similar directions) and Negative numbers represent negative correlations (two investments that tend to move in opposite directions). An example of a positive correlation would be the stocks of two similar companies. An example of a negative correlation would be the asset classes of Stocks and Bonds. Diversification strategies are focused on identifying opportunities with negative correlations because price movements cancel each other out and reduce the overall risk of the portfolio. There are some instances that you may not want diversification for strategic reasons. However, understanding the definition for diversification enables you to make better financial decisions.

Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.

[aguajardo]

Zach, excellent explanation of diversification. Keep the videos coming. I'm now following you.

[Mwf]

After listening your lectures honorable sir . i have no words to thanks you . love you sir

[pelumiobasa]

You've got some great videos sir I'm really learning a lot here

[BUBALAJOLIE]

I need an explanation on capital budgeting sir your videos are great