3 ms·
Sir/Madam, that is incorrect. Diversification can easily lower expected value, or raise it. It should maximize your signal to noise ratio, if properly done.
by vasilipupkin 12y ago
Sir/Madam, that is incorrect. Diversification can easily lower expected value, or raise it. It should maximize your signal to noise ratio, if properly done.
- msellout 12y agoYou're using a different definition than the one I learned in school. The purpose of diversification, as opposed to simply picking the best asset, is to decrease variance. Given a choice between two assets, or portfolios, one first maximizes expected value. Between two portfolios of equal expected value, you pick lower variance. That's the rational thing to do if you are managing a fund. The whole risk ratio thing arises only because so many investors are trying to build a well-diversified portfolio and bid up or down the price of assets accordingly. Price in turn affects expected return -- the expected value of the asset.
- vasilipupkin 12y agoMy point is simply that diversification results in a different expected return of the final portfolio. Before diversifying your expected return was R1 and after it will be R2 where R1 != R2. So, for choosing startup vs big co, or one startup vs another, this is relevant as well.
- imh 12y agoI believe the definition they are using is something like: given a random process X for your percent return, if you invest in n nths of your money into iid copies of X, you will get the same expectation, but with smaller variance compared to putting it all into one copy of X. That's diversification.