diversification premium

The diversification premium refers to the additional return an investor can earn by spreading investments across different assets, sectors, or regions. By diversifying, investors reduce the risk that a poor-performing asset will significantly impact the overall portfolio. This safety often allows investors to accept slightly lower returns from individual assets, but combined, the diversified portfolio tends to provide a higher and more stable overall return than any single asset alone. Essentially, the diversification premium is the reward for reducing risk through diversification, leading to better risk-adjusted performance over time.