By John Lunt via Iris.xyz
The principal of diversification drives asset allocation for both institutional and individual investors.
The benefits of diversification do not come from simply adding more investments to an asset allocation, but rather, from adding investments with lower correlations to existing investments within the allocation. However, a prospective investment may have a higher correlation to existing investments, while still bringing desirable attributes like the potential for lower volatility, downside protection, or upside outperformance. Ultimately, investors hope to generate more return per unit of risk. Return requires risk, and we believe that risk is either derived from the asset class (market risk or market beta) or from the manager (strategy risk).