Portfolio Diversification

This question practices a core capital markets concept, how spreading investments across different assets can change a portfolio’s risk profile. Candidates need to understand the difference between holding many positions and holding positions that behave differently from one another, because diversification depends on how returns move relative to each other, not just on the number of names owned. Interviewers ask this because portfolio construction is central to asset management, hedge funds, and investing more broadly, and they want to see whether you can explain how risk can be reduced without assuming every investment will move in the same way. It also tests whether you can distinguish company specific and industry specific risk from broader market risk, which is a key part of investment analysis.