Glossary entry
Risk diversification focuses on spreading the sources of potential loss, rather than merely increasing the number of holdings. Positions may share exposure to interest rates, a single economy, or a common funding source even when their labels differ. Mapping these connections helps reveal whether adding an investment meaningfully changes the portfolio's overall vulnerability.
Illustrative example
Shares in a bank, a property developer, and a mortgage fund look different, yet all may be sensitive to the same housing downturn.
What to consider
Relationships can strengthen during market stress. Diversification assumptions should be reviewed as holdings, economic conditions, and correlations change over time.
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