Trilogy on Risk - The Lessons and Limits of Diversification

Mercer Insights

Trilogy on Risk Part 3: The Lessons and Limits of Diversification

The first installment in the series focused on refining definitions of risk, so that portfolios would reflect better alignment with the risk tolerance of the investment committee. The second article delved into the hazards of ad hoc changes to policy when there is a mismatch between risk definitions and investor expectations. This final paper tackles the recent history, role, and expectations of diversification, including the value of rebalancing. Faith in the power of diversification has been severely tested since the Global Financial Crisis (GFC), prompting the question: Is diversification still worthwhile?


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