Types of Diversification in Portfolio Management: 

•   Currency-Related Diversification: Involves including instruments with different reference currencies in the portfolio.  
•   Geographical Diversification: Achieved by investing in various geographic areas around the globe.  
•   Sectoral Diversification: Focuses on various cyclical and defensive sectors.  
     

 Importance of Portfolio Diversification: 

•   Risk Mitigation: Diversification helps limit exposure to risk and protects the portfolio from individual bankruptcies and market shocks.   
•   Increased Chances of Earnings: Owning a diverse range of assets can expand opportunities for potential earnings.   
•   Avoiding Concentration Risk:Prevents excessive focus on specific assets, reducing the risk of significant economic loss.  
      

 Portfolio Diversification and Correlation:  

•   Expected Value: The average value of a random phenomenon.  
•   Variance:Indicates how much an actual value deviates from the forecasted value.  
•   Correlation:The relationship between two variables, indicating how one variable corresponds to another.  
•   Correlation in Diversification:Diversification involves creating baskets with little or no correlated securities to minimize mutual influence.  
     

 Portfolio Diversification Strategy:  

•   Diverse Investments:Includes shares, commodities, forex, indices, and bonds.  
•   Evaluation of Correlation:Assessing how different assets within the portfolio influence each other.  
•   Decreased Volatility:A well-planned diversification strategy reduces volatility and drawdown, increasing profitability.  
     

 Portfolio Diversification Example: 

•   Harry Browne's Model:  
  •   Divides the portfolio into four parts:  
    •   25% shares  
    •   25% gold  
    •   25% short-term government bonds  
    •   25% long-term government bonds  
         

 Beta and Systemic Risk:  

•   Beta Value:Indicates the behavior of a security or portfolio in relation to the volatility of its benchmark index.  
•   Interpretation:  
  •   Beta of 1: Moves in line with the market.  
  •   Beta > 1: Moves with higher volatility than the market.  
  •   Beta < 0: Moves in the opposite direction of the market.  
•   Significance in Diversification:Beta helps understand how much a security is exposed to systemic risk.  
     

 ETF Portfolio Diversification: 

•   ETF Trading:Effective tool for portfolio diversification.Involves trading ETFs to gain exposure to various asset classes without purchasing multiple equity lines.