They are required as part of investment characteristics in portfolio performance measurement.
'Diversification benefits' are ex-post (after the process) whereas 'diversification potentials' are ex-ante (before the process).
The benefits are a reduction in volatility, and a greater assurance of achieving one's expected return. A disadvantage is an averaging of returns against the opportunity of a superior return from selectivity.
Benefits are as explained above by Bauman. Potential may refer to correlation. The lower the correlation between the return on an asset and the market return, the greater the potential benefit (in terms of diversification) from holding the asset.
Hi,
Here is a puzzling answer:
Portfolio concentration and performance of institutional investors worldwide
Journal of Financial Economics, January 2017, 123, Pages 189-208
Nicole Choi, Mark Fedenia, Hilla Skiba, Tatyana Sokolyk
Best regards
Diversification benefits, helps investors lower their risk by spreading money across and within different asset classes, such as stocks, bonds and cash.
- It also helps minimize the risk of loss to overall portfolio.
- Exposes to more opportunities for return.
- Safeguards against adverse market cycles.
- Reduces volatility.
While, diversification potentials provides investors and analysts with a valuable tool.
Thank you so much. You mean diversification potentials provide a valuable tool for diversification planning or execution?
Diversification lowers your portfolio's risk because different asset classes do well at different times. If one business or sector fails or performs badly, you won't lose all your money. Having a variety of investments with different risks will balance out the overall risk of a portfolio.
Thank you for your response. But can you shed light on the difference between potentials and benefits of investment diversification?
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