Diversification works because forming stocks into portfolios reduces the standard deviation of returns for each stock.

Standard Deviation

A statistical measurement that depicts the variability or spread of a set of data points or investment returns around their mean.

Diversification

An investment strategy aimed at reducing risk by allocating investments among various financial instruments, industries, and other categories.

Portfolios

A collection of different types of investments (such as stocks, bonds, commodities, etc.) that an individual or institution holds.