Why Diversification Matters

Diversification is the practice of spreading investments across different assets so a single setback does not dominate your results. In this lesson, Professor Mark Davis explains why diversification matters, how it can reduce portfolio risk without eliminating it, and why the real goal is to improve the balance between return potential and volatility.

You will learn the core risk concepts behind diversification, including concentration risk, correlation, and the trade-off between holding too few and too many similar investments. The lesson also introduces the idea that diversification works best when assets react differently under changing market conditions.