THREE TYPES OF DIVERSIFICATION
Diversification is among the most important and underutilized tools available to traders and investors because it allows improvement of our rates of return without proportionately increasing risk assumed to achieve these enhanced levels of performance. The most commonly employed type of diversification—asset class diversification—has already been discussed in Chapters 3 and 4, where we looked at how diversification among assets that had low correlations improved our overall performance. A review of Tables 3.2 to 3.13 and Tables 4.4 to 4.8 shows that diversification almost always yielded improvements when compared with the performance of individual assets.
This chapter focuses on the two other diversification methodologies: adaptation of different parameter sets for the same trading system and combining of negatively and/or uncorrelated trading systems.
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