Diversification
Diversification is a form of risk management approach that involves several forms of investment in a portfolio. A varied portfolio consists of distinctive investment vehicles and asset types that play a vital role in limiting exposure to risk or any single asset. The concept behind this specific system is to ensure the portfolio that has been constructed for different types of assets will, on normal, circumstances results in the reduction of risk of any individual security as well as yielding higher long term returns.
Define and give other terms for systematic risk and unique risk
Systematic risk can be defined as risk intrinsic to a whole market or market section. In most cases, the systematic risk usually affects the overall market other than a specific industry or a stock within a market. Such kind of risk is tough to predict or avoid. Systematic risk is also referred to as market risk, volatility, or undiversifiable risk.
Unique risk also referred to as idiosyncratic risk or unsystematic risk, is a form of company risk that can only be terminated through the process of diversification.
Why international diversification may further reduce portfolio risk
Any form of a portfolio that has been identified to have a mix of three markets have been identified to yield better results as compared to the other portfolios invested in just a single market. Trough this international diversification; we force out the competent frontier that is made out of domestic portfolios. The result of this is to reduce the risk as well as increasing the return that might be expected