Diversification Effect: Isolating the Effect of Correlation on Portfolio Risk

Hight, Gregory N.
May 2010
Journal of Financial Planning;May2010, Vol. 23 Issue 5, p54
Academic Journal
The article discusses the implication of diversification effect (DE) in portfolio risk. It explains that DE is considered as a reduction in portfolio risk which is a result of imperfect correlations between asset return pairs. It states that DE is essential in dealing with correlations that are independent of rate of return. It mentions that DE can be measured using correlation coefficients in practical applications of portfolio management. Moreover, it indicates that asset allocation and risk confound correlation as a measure of DE.


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