What is the scoring of diversity?

In the world of finance, the score of diversity is a tool used to measure the amount of diversification that exists between a group of securities. As diversification increases, the risk of securities as a whole is generally decreasing, so this score, developed by Moody's Investors Service, is extremely important. The variety of diversity is often used to assess the risks associated with collateralized debt obligations, which are loans packages that buy and sell institutional investors. This score is determined by the diversity of industries included in the securities group, with a higher score representing a higher level of diversification.

Individual investors and large financial institutions have something to do in the sense that most of these entities are looking for diversity. If the diversity is made in a securities portfolio, the risk associated with investment will be reduced. While one or even several securities may be insufficiently powerful, the diversity ensures,that tportfolio as a whole remains strong. One way to measure the amount of diversity present in a large group of investment is the score of diversity.

The main determining factor in the scoring of the diversity is the industry from which it emits specific security. For an easy example, imagine one investor who has two shares, one of the technological industry and the other in the retail industry. On the other hand, the second investor has two technological shares and nothing else. While the first investor would have a higher score because its portfolio is represented by two different industries, the second investor is exposed to a potential slump in the technology industry and its score suffers.

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Investor Service has developed the concept of diversity with the intention of providing accurate measurements for the risk associated with secured debt obligations or CDOS. Cdo is a group of debt securities that ktEré is bought and sold in one package. Any CDO that has a good score is well diversified and protected from any only industry that immerses.

There are several disadvantages of using a variety of risk measurement. The score depends on the theory of industry correlation, which states that companies in the same industry tend to perform in the same way and will be at the same risk. In fact, there are times when industry correlation is far from perfect. In order to even more confuse the matters, companies in the heterogeneous industries can show correlation, which means that the risks could be extended across industries.