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Diversification (finance)

In fiance, diversification is the process of allocating capital in a way the reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets. If asset prices do not change in perfect synchrony, a diversified portfolio will have less variance that the weighted average variance of its constituent assets, and often less volatility than the least volatile of its constituents.

Diversification is one of two general techniques for reducing investment risk. The other is hedging.