Together, these basically say that the longer you can invest, the more risk you can take in exchange for a potential higher rate of return . But you can also reduce the risk in your portfolio by pursuing a strategy of diversification .
Diversification is a key benefit of setting up a portfolio.
Since prices of securities don't move together, the key to diversifying your portfolio is to invest in securities whose prices are not correlated . You can eliminate much of the extra risk in your portfolio with only a small decline in returns. Correlation uses a correlation coefficient to measure the price relationship of two or more securities. A coefficient of -1.0 between two stocks means that their prices move in the opposite direction and magnitude . For example, if Gazelle's stock rises 5 percent over the next three months, Antelope's stock price would fall exactly 5 percent for the same period.