Free Lunch✓ Mathematical
◆ The PatternThe only free lunch in finance — spread risk across uncorrelated bets
Adding N uncorrelated assets reduces portfolio volatility as 1/√N. Effective diversification requires genuine independence — not just different tickers.
σp = σ / √N (equal weight, zero correlation)
True diversification spans asset classes (equity, bonds, commodities, real estate), geographies, strategies, and time horizons. The diversification ratio measures how much idiosyncratic risk has been diversified away.
// Interactive — number of assets vs. portfolio volatility
Number of assets
Diminishing returns. Most diversification benefit arrives by 15-20 uncorrelated assets — beyond that, marginal reduction is small.
Pattern bridge: The law of large numbers formalizes this in The Toolkit — CLT.