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Why is diversification important? How does it affect financial planning?

Why is diversification important? How does it affect financial planning?

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Answer #1

Diversification is very important to mitigate risks or volatility of securities. It ensures good returns while minimizing unsystematic risk. However, it cannot hedge or protect against systematic risk.
Diversification is important for financial planning as it ensure what should be weights of securities and what kind of securities should be taken in the portfolio to minimize risk. Stocks with negative beta correlation are chosen while planing to ensure maximum benefit of diversification.

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