... market. Market swings create volatility. Having non-correlated investments in your portfolio can provide stability.Consequently, in order to control a portfolio risk investors should use the diversification method whereby investments are made in a large variety of assets for the purpose of reducing risk. The risk of individual assets in a portfolio should be measured in the context of their effect of return on the overall portfolio variability. In order to illustrate the effect of diversification, we should take under consideration covariance and correlation theories. In fact, a way to measure covariance is to look at assets' returns or deviations from expected value. When in two assets your correlation coefficient equals to 1, it is like you have one asset. This happens because the two assets will move to the same direction implying a high portfolio risk. In plain words, it is better to put a lot of ...

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