ZERO EQUILIBRIUM® APPLIED FINANCE: Diversification: Horizontal and Vertical Diversification Diversification can be defined as holding a composition of differentiated assets (within or across asset classes), that presents the most optimal risk-reward balance. If a stock portfolio owns five banking stocks, and another holds five stocks in different industries: one escape of Telecom, Banking, Oil and Gas, Industrials, and Phrama, they both hold a similar portfolio mix but exposed to different risks and returns. Whilst the former with a concentrated holding of banks can gain exponentially in the event of a major bid driving up prices of banking sector stocks relative to their industry, it is also more exposed when the market sentiment on the banking sector turns negative. But, Diversification is deeper than just owning different assets, the composition of these assets and the correlation risks matter as much ad the distribution of capital across assets. To be able to diversify, you'd need to be able to understand, and identify the risks every asset exposes you to. The cocept of Diversification is more complex than what it is often reduced to. The principle goes much deeper than that. 1/8