Question

How high level diversification is different from buying shares in one industry like buying shares of 4 major banks?

Answer 1

Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. Most investment professionals agree that, although it does guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk.

Portfolio diversification basically means to deploy your funds into different asset classes with the objective of reducing risk and to prevent the impairment of the entire portfolio because to bad performance of a particular asset class.

Diversification basically means having eggs in different baskets, so when you drop one basket, all is not lost.When you have different stocks within your portfolio, you reduce your chance of irreparable damage when a stock you own goes to zero without warning (like Enron).