The benefit of diversification is often called the only free lunch in investing. The promise of generating the same ‘return’ while bearing less ‘risk’ is compelling. For a simple illustration of this tantalising promise, assume a world where it’s either raining or sunny with equal probability, and consider an investor with the following choices: Invest 100% of her capital in a company selling umbrellas.Invest 100% of her capital in a company selling ice-cream.Invest 50% of her capital in a company selling umbrellas & 50% of her capital in a company selling ice-cream. The expected return of the portfolio is the…
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