Spreading exposure across assets whose returns are not perfectly correlated, so that total risk is lower than the sum of the parts. It removes idiosyncratic risk but not systematic risk.
Where you will meet it
Diversification comes up in 57 learning outcome notes across the FRM syllabus.
A few of them:
Exchanges and OTC Markets FRM Part I · Financial markets and products
“Mitigants include close-out netting, collateral under a credit support annex, central clearing for standard products, credit limits, rating triggers, payment-versus-payment settlement, diversification, and credit valuation adjustment priced into the trade.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“Under the CAPM, and in a frictionless efficient-market framework generally, only systematic risk is priced, since it cannot be diversified away.”
Multivariate Random Variables FRM Part I · Quantitative analysis
“A positive correlation lowers the benefit of diversification and, in a long-short position, makes the spread less volatile.”
Measures of Financial Risk FRM Part I · Valuation and risk models
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