Diversification can help an investor manage risk and reduce the volatility of an asset's price movements. ... You can reduce the risk associated with individual stocks, but general market risks affect nearly every stock and so it is also important to diversify among different asset classes.

Why does diversification reduce risk?

Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximize return by investing in different areas that should each react differently to changes in market conditions.

Does diversification reduce systematic risk?

Diversification can greatly reduce unsystematic risk from a portfolio. ... It is called systematic risk or market risk. However, the expected returns on their investments can reward investors for enduring systematic risks. Investors are induced to take risks for potentially higher returns.