Risk involves the possibility that the actual return on an investment will differ from the expected return. Risk includes the possibility of losing part or all of the initial investment. Different versions of risk are typically measured by calculating the standard deviation of historical returns or average returns of a specific investment. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”?Get the original essayRisk involves future uncertainty about deviation from expected benefits or outcomes. Risk measures the uncertainty that an investor is willing to accept to make a profit on an investment. Risks are of different types and arise from different situations. We have liquidity risk, sovereign risk, insurance risk, commercial risk, default risk, etc. Various risks arise from uncertainty arising from various factors that influence an investment or situation. Diversification is a technique that reduces risk by spreading investments across various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event. Most investment professionals agree that, although it does not guarantee against losses, diversification is the most important element in achieving long-term financial goals while minimizing risk. . Here we look at why this is true and how to achieve diversification in your portfolio. Investors face two main types of risks when investing: Indiversifiable – Also known as “systematic” or “market risk,” non-diversifiable risk is associated with every company. The causes are factors such as inflation rates, exchange rates, political instability, war and interest rates. This type of risk is not specific to a particular company or sector and cannot be eliminated or reduced through diversification; it's simply a risk that investors must accept. Diversifiable – This risk is also known as “unsystematic risk” and it is specific to a company, sector, market, economy or country; it can be reduced through diversification. The most common sources of unsystematic risk are business risk and financial risk. So, the goal is to invest in diverse assets so that they are not all affected by market events in the same way. Why we should diversify Let's say we have a portfolio consisting only of airline stocks. If it is publicly announced that airline pilots are on an indefinite strike and all flights are canceled, airline stock prices will fall. Your portfolio will experience a notable drop in value. If, however, we counterbalanced airline stocks with a few rail stocks, only part of your portfolio would be affected. In fact, there's a good chance that rail stock prices will rise, as passengers turn to trains as an alternative means of transportation. But we could diversify even further because there are many risks that affect both rail and air, because everyone is involved. in transport. An event that reduces any form of travel hurts both types of businesses - statisticians would say that rail and airline stocks have a strong correlation. Therefore, to achieve higher diversification, we would like.