Naïve diversification

Naïve diversification is a strategy whereby an investor simply invests in a number of different assets and hopes that the variance of the expected return on the portfolio is lowered. It is a diversification of a portfolio without regard, for the mathematical formulas in the capital asset pricing model. Naive diversification rests on the assumption that simply investing in enough unrelated assets will reduce risk sufficiently to make a profit. Alternately, one may diversify naively by applying the capital asset pricing model incorrectly and finding the wrong efficient portfolio frontier. Such diversification does not necessarily decrease risk at a given expected return, and may in fact increase risk.