Definition:
Diversification: Modern portfolio theory (MPT) uses diversification to spread portfolio risk. Holding many types of securities in the portfolio means that underperformance of a single security does not impact the total portfolio's return. Though the entire industry sector or group, or market as a whole may decline (see: systemic risk), diversification is key element of sound portfolio construction.
Also Known As: variation, modification
Common Misspellings: deversification
Examples:
A client's portfolio has a total of 50 stock positions. More than half of these positions are related to the oil industry. This lack of diversification puts the client's portfolio at risk. Spreading capital across industry groups diversifies the portfolio.