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Multi-Asset Investing: A practical guide to modern portfolio management by Yoram Lustig

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10. Diversification

Diversification in layman’s terms is not putting all your eggs in one basket. It is the process of seeking different sources of return and combining them based on their risks and interdependencies. The interdependency among investments must be imperfect to benefit from the risk-reduction of diversification.

Correlation (r, the Greek letter rho) is a measure of linear interdependency [126] . Correlation of +1.0 means a perfect positive linear relationship (i.e. when one investment moves up or down the second one moves in the same direction) and correlation of -1.0 means a perfect negative linear relationship (i.e. anti-correlation, when one investment moves up or down the second one moves in the opposite direction). Correlation ...

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