By protecting you on the downside, diversification limits you on the upside—at least, in the short term. Over the long term, diversified portfolios do tend to post higher returns see example below. Smart beta strategies offer diversification by tracking underlying indices but do not necessarily weigh stocks according to their market cap.

ETF managers further screen equity issues on fundamentals and rebalance portfolios according to objective analysis and not just company size. While smart beta portfolios are unmanaged, the primary goal becomes outperformance of the index itself. Say an aggressive investor who can assume a higher level of risk, wishes to construct a portfolio composed of Japanese equities, Australian bonds, and cotton futures. With this mix of ETF shares, due to the specific qualities of the targeted asset classes and the transparency of the holdings, the investor ensures true diversification in their holdings.

Also, with different correlations, or responses to outside forces, among the securities, they can slightly lessen their risk exposure. For related reading, see " The Importance Of Diversification ". Portfolio Management. Risk Management. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.

These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Investing Portfolio Management. What Is Diversification? Key Takeaways Diversification is a strategy that mixes a wide variety of investments within a portfolio. Portfolio holdings can be diversified across asset classes and within classes, and also geographically—by investing in both domestic and foreign markets.

• What is diversification?.
• Diversification: Definition, Levels, Strategy, Risks, Examples.
• What is Diversification Strategy? (Definition and Examples).
• What is Diversification Strategy? (Definition and Examples).
• aims stress free trading system.
• Navigation menu.
• axis bank forex card internet login?

Diversification limits portfolio risk but can also mitigate performance, at least in the short term. Pros Reduces portfolio risk Hedges against market volatility Offers higher returns long-term. Cons Limits gains short-term Time-consuming to manage Incurs more transaction fees, commissions. Compare Accounts.

The offers that appear in this table are from partnerships from which Investopedia receives compensation.

Related Terms Holdings Holdings are the securities held within the portfolio of a mutual fund, hedge fund, pension fund, or any other fund type. Asset Mix The asset mix is the breakdown of all assets within a fund or portfolio, helping investors understand the composition of a portfolio. Risk Parity Definition Risk parity is a portfolio allocation strategy that uses risk to determine allocations across various components of an investment portfolio. Fund Overlap Definition Fund overlap is a situation where an investor invests in several mutual funds with overlapping positions.

Asset Allocation Fund An asset allocation fund is a fund that provides investors with a diversified portfolio of investments across various asset classes. Partner Links. Related Articles. It occurs when the organization adds related products or markets. The goal of such diversification is to achieve strategic fit. Strategic fit allows the organization to achieve synergy. In essence, synergy is the ability of two or more parts of the organization to achieve greater total effectiveness together than would be experienced if the efforts of the independent parts were summed.

Synergy may also be achieved by combining different organizations with complementary marketing, financial, operating, or management efforts. Financial synergy can be obtained by combining an organization with strong financial resources but limited growth opportunities with an organization having great market potential but weak financial resources. Strategic fit in operations can result in synergy by the combination of operating units of an organization to improve overall efficiency.

Diversification Strategies – Strategic Management

Combining two units improve overall efficiency since the duplicate equipment or parallel work on research and development are eliminated. Concentric diversification can be a lot more financially efficient as a strategy, since the business may benefit from the synergies in this diversification model. It may enforce some investments related to modernizing or upgrading the existing processes or systems.

It is also known as heterogeneous diversification. It relates to moving to new products or services that have no technological or commercial relation with current products, equipment, distribution channels, but which may appeal to new groups of customers. The major motive behind this kind of diversification is the high return on investments in the new industry. Furthermore, the decision to go for this kind of diversification can lead to additional opportunities indirectly related to further developing the main business of the organization such as access to new technologies, opportunities for strategic partnerships, etc.

In this type of diversification, synergy can result through the application of management expertise or financial resources, but the primary purpose of conglomerate diversification is improved profitability of the organization. In this type of diversification there is little or no concern that is given to achieve marketing or production synergy. One of the most common reasons for pursuing a conglomerate diversification strategy is that opportunities in the organizational current line of business are limited.

Finding an attractive investment opportunity requires the organization to consider alternatives in other types of business. Organizations may also pursue a conglomerate diversification strategy as a means of increasing the growth rate. Growth in sales can make the organization more attractive to investors. The disadvantage of a conglomerate diversification strategy is the increase in administrative problems associated with operating unrelated businesses.

Horizontal integration occurs when an organization enters a new business either related or unrelated at the same stage of production as its current operations. In this case the organization relies on sales and technological relations to the existing product lines. Horizontal diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced. Moreover, the new products are marketed to the same economic environment as the existing products, which may lead to rigidity or instability.

Vertical diversification occurs when an organization goes back to previous stages of its production cycle backward integration or moves forward to subsequent stages of the same cycle forward integration. This means that the organization goes into production of raw materials, distribution of its products, or further processing of the present end product. Backward integration allows the diversifying organization to exercise more control over the quality of the supplies being purchased. Backward integration can be undertaken to provide a more dependable source of needed raw materials.

Forward integration allows the organization to assure itself of an outlet for its products. Forward integration also allows the organization better control over how its products are sold and serviced. Furthermore, the organization may be better able to differentiate its products from those of its competitors by forward integration.

Corporate diversification involves production of unrelated but definitely profitable goods. It is often tied to large investments where there may also be high returns. One form of internal diversification is to market existing products in new markets. An organization may elect to broaden its geographic base to include new customers.

The organization can also pursue an internal diversification strategy by finding new users for its current product. Another form of internal diversification is to market new products in existing markets. Generally this strategy involves using existing channels of distribution to market new products. It is also possible to have conglomerate growth through internal diversification.

This strategy would entail marketing new and unrelated products to new markets. This strategy is the least used among the internal diversification strategies, as it is the most risky.

CONCENTRIC DIVERSIFICATION

External diversification occurs when an organization looks outside of its current operations and buys access to new products or markets. Mergers are one common form of external diversification. Mergers occur when two or more organizations combine operations. These organizations are usually of similar size.

One goal of a merger is to achieve management synergy by creating a stronger management team.

• cara masuk instaforex!
• To Diversify or Not To Diversify.
• Why Do Companies Diversify?.
• beacon health strategies valueoptions merger.
• bet angel trading strategies.
• Strategic Management - Diversification;
• To Diversify or Not To Diversify.

This can be achieved in a merger by combining the management teams from the merged firms. Acquisitions, a second form of external growth, occur when the purchased organization loses its identity.

Complete Guide to Diversification Strategy

The acquiring organization absorbs it. The acquired organization and its assets may be absorbed into an existing business unit or remain intact as an independent subsidiary within the parent organization. Acquisitions usually occur when a larger organization takes over a smaller organization.