What Is a Diversifiable Risk?

Diversified risk refers to increasing the number of similar risk units to improve the predictability of future losses in order to reduce the possibility of risk occurrence.

Spread risk

Diversified risk refers to increasing the number of similar risk units to improve the predictability of future losses in order to reduce the possibility of risk occurrence.

Diversified risk In securities investment, an investment strategy is adopted to diversify investment to avoid investment risk. Of course, the investment target is not only securities, but also fixed deposits and various insurance premiums. Endowment insurance metal belongs to the deposit group, and gold jewelry and antiques belong to the property group. As far as the deposit group is concerned, if the value of the currency is stable, it is the safest although the profitability is lower. As far as the property group is concerned, although it is more cumbersome and risky, it is most beneficial to maintain value during the period of inflation. In marketable securities, there are two types: fixed income and uncertain income. In this way, investors invest in marketable securities in addition to the market, depending on the appropriate proportion of different securities. On the issue of diversifying risk, the most common methods are "dichotomy" and "tripartite". ^[1]

In securities investment, it means allocating funds to multiple assets.

Since investing, there must be risks. In investment theory, "risk" can be interpreted as the possibility of the difference between the actual return and the expected return, which of course includes the possibility of loss of the principal. Each investment vehicle involves different levels of risk, which can be divided into

In the United States, most investors who invest in funds include global or international funds that invest overseas in their portfolios, making them part of their asset allocation. For a long time, this has become the traditional way for investors to further diversify their investment risks. More than a decade ago, the direction of the stock market in the United States and other parts of the world was rarely the same. However, the continuous development of the world economy has deepened the correlation between economic development in various regions and countries. Some people in the investment community have begun to think that the correlation between different stock markets around the world is gradually increasing, which has reduced the global dispersion. Effectiveness of investment. However, the degree of relevance is not as close as some in the industry believe, so it still provides a solid opportunity for the effectiveness of diversifying investments globally to further diversify risks.

In fact, the extent to which countries or regions depend on the destiny of the US economy varies greatly. For example, countries or regions that rely on exports to the United States to develop their economies: Mexico, Singapore, and Taiwan, China are more vulnerable to the health of the U.S. economy; while other countries, such as Brazil, India, and Russia, have their economic exports targeted More countries, and have a relatively large domestic market. Therefore, the impact on the US economy will be relatively small.

The debate over how the slowing U.S. economic development will affect the prospects of other stock markets around the world. One side of the argument is that because the US economy is still the world's largest economy, a slowdown in the US economy will have an impact on the direction of the global stock market. The other side of the argument, however, is that the development of the world economy, especially in rapidly developing emerging market countries such as China, India and Brazil, will not stagnate due to the slowdown of the US economic development. They believe that these fast-growing economies that provide them with raw materials will not be in trouble due to the recession in the United States. For example, China has a considerable amount of foreign currency savings, which can financially support its continuous infrastructure construction. Moreover, the construction and development of such infrastructure will not be slowed down by the decline in the US demand for Chinese imports.

Although there is no clear answer as to whether the prospects for the development of the world economy will be closely linked to the prospects for the development of the US economy, there is sufficient evidence to prove that the situation of different stock markets around the world is not necessarily high. Interconnectedness. For example, the United States and Canada are two major trading partners, and the economic relevance of these two countries is very high. However, their correlation in the stock market was only 73% in the last 10 years from 1988 to 2007. The relevance of the US stock market to the stock markets of other major US trading partners is even lower. For example, the relevance to the Japanese market is only 35%; the relevance to the British stock is only 65%. This further shows that the close relationship between countries' economic development does not necessarily mean that the trends between stock markets are completely synchronized.

Investors who allocate a portion of the assets in their portfolio and invest globally will still benefit from diversified investments. The following chart provides a clear comparison of the return correlation between the US stock market and the stock markets of other major countries around the world over the 10 years from 1988 to 2007. A correlation of 100% means that the stock market of a country is completely synchronized with the stock market of the United States. On the contrary, if the correlation is 0%, it means that the stock market of this country has no correlation with the stock market of the United States.

It can be seen that Canada has the highest degree of correlation with the trend of the US market, but only 73%. The Hong Kong stock market, which has a close relationship with the mainland A-share market, has only a 51% correlation with the US stock market over the past 10 years. This further illustrates that investing a part of assets in overseas markets through QDII products can still provide effective risk diversification.