So is diversification a type of hedging? Or is hedging a specific type of diversification? Or are hedging and diversification different things?I tend to think of hedging as something you do to protect against a specific known risk (I know that interest rates can change, but I want the credit spread, so I'll buy this type of credit, but my purchases will include a hedge to remove the interest rate risk).I tend to think of diversification as something you do to protect against unknown risks, or risks that cannot be specifically hedged (should I be worried about earthquakes in California, riots in Basra, the CEO being hit by a truck, or something else I haven't thought of - so better have lots of different things in my portfolio).I'm sure there is a relationship between hedging and diversification, but I'm having trouble specifying it... any thoughts here?
Last edited by CariocaBruce
on December 6th, 2007, 11:00 pm, edited 1 time in total.