Portfolio Diversification | Same Asset Class

It is possible to gain Portfolio Diversification benefits from within one asset class. The whole purpose of Portfolio Diversification is to try and build a robust portfolio of trading strategies; that perform well in a host of different economic environments.

Whilst you need to be selective of the assets you chose, the portfolio diversification benefits are clear.

Diversification is a tool that we can use to strengthen our portfolio. Being able to diversify across different asset classes, and within the same asset class, allows us to take a multi-pronged approach.

Care must be taken.

Although it is possible to diversify within an asset class, care must be taken because some assets within the same asset class are less correlated than others. For instance, in the commodities asset class, Natural Gas isn’t correlated to Coffee.

In the video below, we’ll go over another example using three uncorrelated forex pairs. Because they’re uncorrelated it means they provide a diversification benefit despite being in the same asset class.

It is important to note, due to the random aspect of the financial markets, two uncorrelated assets can exhibit correlated behaviour some of the time.

In this last post on Portfolio Diversification, we touched on some of the metrics you can use on the Darwinex platform to see how diversified and robust your portfolio is.

We’ll go over one of the investible attributes to further illustrate how useful these can be. The OsCs investible attribute provides a what-if scenario metric. It looks at the quality of the traders’ entries and exits and simulates results based on different entry and exits.

Darwinex provides 12 investible attributes that allow the trader to review different aspects of their trading strategies performance.

Along with various other metrics, these provide a powerful suite of tools to analyse the effectiveness of your edge. Using these the trader can judge entry/exit performance, scalability of the underlying strategy and diversification benefit to name a few.

What do you think the most important trading metric is to a trader?

Tag us on Twitter (@Darwinexchange) with your thoughts.

Brought to you by Darwinex: UK FCA Regulated Broker, Asset Manager & Trader Exchange where Traders can legally attract Investor Capital and charge Performance Fees.

Risk disclosure:

Content Disclaimer: The contents of this video (and all other videos by the presenter) are for educational purposes only, and are not to be construed as financial and/or investment advice.

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