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What Is Diversification Analysis?

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  • Written By: Jim B.
  • Edited By: Shereen Skola
  • Last Modified Date: 20 November 2016
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A diversification analysis is a type of study performed by investment experts or business managers to ensure that diversity can be found in their various entrepreneurial endeavors. Diversity is widely sought because having capital in a variety of instruments encompassing multiple strategies minimizes the risk of one particular situation causing major damage. In terms of investing, a diversification analysis is concerned with investors choosing different types of instruments that are spread out both in terms of the type of investment and its market sector. Businesses should also be concerned about diversity in terms of their product lines and the markets they choose to inhabit.

Perhaps the best way to think of diversification is to think about the old adage that says that a person shouldn't put all of his or her eggs in one basket. Money works in the much the same way. If all of the money that a person or a business contains is placed in a single enterprise, financial ruin may result from the enterprise failing to produce the desired results. As a result, a diversification analysis should be a part of any solid investment strategy, whether it is employed by an individual person or a large corporation.

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There are many ways to diversify an investment portfolio. A proper diversification analysis will make sure that diversity is achieved in a number of ways. First and foremost, an analysis should determine whether investments are properly divided among the many types of investment opportunities, such as stocks, bonds, commodities, and the like. These instruments often move up and down in inverse proportion to each other, so an investor whose portfolio is properly divided between them is likely to stay afloat no matter what economic conditions are prevailing.

In addition, a diversification analysis for investments should also concentrate on the sectors of the market that a portfolio reaches. For example, an investor with all of his money in technology stocks will suffer if that sector goes into a downward spiral. As a result, the analysis of diversification should be attuned to how a portfolio is spread out through all of the various market sectors. There should also be diversity among the types of companies being targeted in terms of size and growth potential, and there should also be some attention paid to international investment opportunities.

Businesses may also have need of a proper diversification analysis in terms of how their products and services are chosen and marketed. If a company has a particular competitive edge in the production of one product, it makes sense for it to focus on that product. It still might be wise for that company to be prepared with other alternatives should demand for that product dwindle. In addition to product management, knowing how to divide marketing resources is another example of where an analysis of diversity can be extremely useful.

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