Let’s cut to the heart of how risk and uncertainty impact diversification
Diversification is inadequate as a risk management technique and too primitive for the new environment of volatility and uncertainty.
Uncertainty
Do quants with algorithms have an advantage over other investors?
Math and algorithms will give precise answers. And therein lies the problem.
Many investors just don’t understand the risk/reward trade-off
Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain.
The conventional view of market efficiency is badly mistaken
Prices in the stock market are never a reliable guide to the fair value of a stock.
Acting with imperfect information
It is all very good to recommend caution, but decisions must be made. In truth, many policies must be established and decisions made with imperfect understanding of the facts and of the risks.