Final answer:
Diversification is a strategy used to minimize risk by investing in a variety of stocks or bonds from different companies. It involves avoiding stocks that are highly positively correlated and investing in different regions of the world.
Step-by-step explanation:
Diversification is a strategy used to minimize risk by investing in a variety of stocks or bonds from different companies. The goal is to avoid having all investments in one stock or market, which can lead to significant losses if that stock or market performs poorly.
When it comes to diversifying a portfolio, it is important to avoid investing in stocks that are highly positively correlated. This means that they tend to move in the same direction, so if one stock performs poorly, the others are likely to as well. It is also important to consider investing in stocks from different regions of the world to further diversify your portfolio.
For example, if an investor only owns tech stocks, and the tech sector experiences a downturn, their entire portfolio would be negatively affected. However, by including stocks from different sectors and regions, the investor can mitigate the impact of any one sector or region's performance.