As we are experiencing the aftermath of some of the worst economic conditions in America since late 1920's and early 30's, we are not far removed from the financial meltdown of 2008-2009 and the carnage it created, especially in the housing sector. The likely outcome for many back then was probably lower valuations of property, or lower portfolio investment value, with recovery in the years that came after. Now, in the midst of what is most certainly a new recessionary era, we face uncertainty and the speed during which this happened has raised volatility in most asset types and raises serious questions about one of the cornerstones of financial theory, diversification.

That takes us to the second weeks discussion topic, which relates to the subject of risk and diversification. In chapter 6, you start reading about portfolio composition and the importance of putting together a diversified portfolio, risk aversion, risk diversification, etc. However, the book also states that simply putting together stocks with high correlation, regardless of the number of stocks, will not achieve the desired diversification, because you would still be exposed to similar industry risk, despite owning companies that are not similar at all.

The question is as following: is this assumption correct when it comes to creating a portfolio with companies in the same industry, such as the financial industry? Can you put together a portfolio of diverse financial companies, such as Wells Fargo (WFC), Citi (C), JP Morgan Chase (JPM), and Bank of America (BAC) all in the same industry, yet so different in what they do, and be confident that you have achieved diversification in your portfolio?