Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Diversification strives to smooth out unsystematic risk events in a portfolio so the positive performance of some investments neutralizes the negative performance of others. Therefore, the benefits of diversification hold only if the securities in the portfolio are not perfectly correlated.
Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction. Investing in more securities yields further diversification benefits, albeit at a drastically smaller rate.
Further diversification benefits can be gained by investing in foreign securities because they tend to be less closely correlated with domestic investments. For example, an economic downturn in the U.S. economy may not affect Japan's economy in the same way; therefore, having Japanese investments gives an investor a small cushion of protection against losses due to an American economic downturn.
The duration is a synthetic index that gathers in one value the duration of a bond and the subdivision payments from the bonds. It indicates the average expiry date of the payments of a bond, indeed: formally is the weighted average of the length of the title, where the weighting weights for each year are given by cash flow ( cash flow) of that year ( the coupon and, for the expiration year, the coupon plus the capital) actualized for the profit of the stock.
By its nature, the duration is also an approximate measure of the volatily of a stock: it is as higher, as the price hikes, that the title will undergo due to a interest rates change, are bigger.
The duration is measured in years. For example, a duration of 3 years means that the value of the bond could rise to 3% if interest rates decrease 1%.
