Portfolio Diversification and Risk Management Key Terms

Reduce your risk with knowledge of portfolio diversification and risk management vocabulary

If you're worried about losing money in the stock market, then portfolio diversification and risk management is for you. By using asset allocation or mutual funds, you can ensure that you don't have too much of your money in any one investment vehicle. Using portfolio theory, you may be able to maximize your results while minimizing any risks. However, proper portfolio diversification begins with a thorough knowledge of the terminology associated with risk management industry.

Efficient frontier

The efficient frontier is an idea that there is a way that someone could have an optimal investment portfolio based on all investment possibilities. The idea was created by Harry Markowitz in 1952.

Asset allocation

When investing, there are different types of investments to choose from, including stocks, bonds and money market accounts. Asset allocation is the way that you decide to split your money between these different types.
U.S. Securities and Exchange Commission offers a beginner's guide to asset allocation.

Mutual funds

Mutual funds are a relatively easy way to diversify your portfolio for risk management. In a mutual fund, a manager selects stocks from several different companies and pools them together. Investors can then purchase a share of the average of these stocks. Mutual funds typically have a theme, such as technology, which means that all of the companies in that fund are from technology companies.

Modern portfolio theory

The modern portfolio theory is a theory about how to get high returns on your stock investments with little risk, an ideal investing situation. The technique focuses on choosing the right combination of stocks in order to reduce risk.

Asset management

For those that can afford one, it may be a good idea to hire an asset management firm. This financial professional can take care of your investments for you. In theory, the person or company you hire has the training necessary to select good stocks, but investing in the stock market always carries some risk.

Risk Management Association

The Risk Management Association helps its members to learn about risk principles in the financial segment. It is a not-for-profit company.

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