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← Diversification: The Only Free Lunch
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Question
What makes diversification "the only free lunch in finance," and who formalised this concept?
1
By combining assets with less than perfect correlation, an investor can reduce portfolio risk without sacrificing expected return — getting a risk reduction "for free"; this was formalised by Harry Markowitz in his 1952 Portfolio Selection paper, earning him the Nobel Prize in 1990
2
Diversification is free because index funds charge no management fees; popularised by John Bogle in the 1970s
3
Diversification is free because it requires no trading costs when stocks are equally weighted; formalised by Eugene Fama in 1970
4
Diversification eliminates all investment risk; formalised by William Sharpe in the Capital Asset Pricing Model
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