ha - brilliant. The fallacy of "diversification" is that it only transfers risk intertemporaly. Ultimately someone will get shafted double or more at some stage - it's just a question of arbing the unstable correl matrix while you can... which can and will go to a fully populated matrix of (abs)1s at some unfortunate stage when you (they!) are left holding the baby. You're left hoping that you'll have been paid a few bonuses before that happens....
The point of diversification is that no one gets shafted because lots of people are left holding the the "baby" together. It does not reduce the total amount of loss but it trades a 1% chance of losing $50 with a 50% chance of losing $1.
sure but when correlations go to 1, you're as badly off as if you only had one position. Diversification engenders false senses of security, and moreover, means everybody has a bit of everything. Therefore mass panic can ensue causing the correl matrix to ramp. See: 2008.
I contend that diversification makes for great maths, but often poor risk management.
