Diversification is based on the allocation of a portfolio of fixed size across several assets, limiting the exposure to any one source of risk. Adding additional risky assets to a portfolio, thereby increasing the total amount invested, does not reduce dollar risk, even if it makes the rate of return more predictable. This is because that uncertainty is applied to a larger investment base. Nor does investing over longer horizons reduce risk. Increasing the investment horizon is analogous to investing in more assets. It increases total risk. Analogously, the key to the insurance industry is risk sharing—the spreading of many independent sources of risk across many investors, each of whom takes on only a small exposure to any particular source of risk. P-968