Diversification
Risk & psychologySpreading capital across holdings to reduce exposure to any single one.
In plain terms
Most of the benefit is captured by about fifteen genuinely uncorrelated positions.
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Glossary
Every term is defined twice: once the way a filing would put it, and once the way somebody would explain it to you across a table. The second one is usually the one that sticks.
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Diversification effect
Technical analysisThe tendency for company-specific surprises to partly cancel out within an index, leaving it less volatile than its constituents.
In plain terms
It is why mean reversion has a genuine basis on an index and a shaky one on a single stock.
Time diversification
Risk & psychologyThe claim that holding equity for a longer period reduces its risk.
In plain terms
True of the annualised return, which converges roughly with the square root of the horizon, and false of the final amount, whose spread widens over the same years. Most arguments about it are two people each defending one half.
Systematic risk
Risk & psychologyRisk from the whole market that diversification cannot remove.
In plain terms
Beta measures your exposure to it. A high-beta portfolio carries it without borrowing.
Correlation convergence
Risk & psychologyThe tendency for correlations between holdings to move towards one during a severe market-wide decline.
In plain terms
Diversification helps least exactly when it is needed most, because in a panic people sell what they can rather than what they want to.
Multicap
Market basicsA SEBI fund category required to hold at least 25% each in largecap, midcap and smallcap stocks.
In plain terms
Forced diversification across sizes. The manager is legally unable to retreat into largecaps during a smallcap crash — which is the whole difference from a flexicap.
Strategy correlation
Risk & psychologyThe extent to which two systems lose money at the same time.
In plain terms
Diversification is defined by whether drawdowns coincide, not by whether the rules look different.