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Diversification in equity markets refers to the process of spreading investments across different assets, sectors, or geographies to reduce overall portfolio risk. The primary objective of diversification is to minimize the impact of poor performance of any single investment on the total portfolio returns. Portfolio risk mainly consists of two components: systematic risk (market-related and unavoidable) and unsystematic risk (specific to a company or sector, which can be reduced through diversification). While systematic risk cannot be eliminated, diversification is highly effective in reducing unsystematic risk by ensuring that adverse events affecting one investment do not disproportionately affect the entire portfolio. The underlying principle of diversification is based on the fact that not all asset prices move in the same direction at the same ___ _________ _________ ___ __________ __________ ___ _______ __________ ________ _____.
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