We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is a Diversity Score?

Jim B.
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

In the world of finance, a diversity score is a tool used to measure the amount of diversification that exists among a group of securities. As diversification rises, the risk involved with the securities as a whole generally lessens, so this score, developed by Moody's Investors Service, is extremely important. The diversity score is often used to judge the risks involved with collateralized debt obligations, which are packages of loans that are bought and sold by institutional investors. This score is determined by the diversity of industries included in a group of securities, with a higher score representing a greater level of diversification.

Individual investors and large financial institutions have something in common in the sense that most of these entities are in search of diversity. If diversity is accomplished in a portfolio of securities, the risk involved with the investments is lessened. While one or even a few securities may underperform, diversity ensures that the portfolio as a whole stays strong. One way of measuring the amount of diversity present in a large group of investments is the diversity score.

The main determining factor behind the diversity score is the industry from which a particular security emanates. For an easy example, imagine one investor who has two stocks, one from the technology industry and another from the retail industry. By contrast, a second investor has two technology stocks and nothing else. While the first investor would have a higher score since his portfolio is represented by two different industries, the second investor is exposed to a potential slump in the technology industry and his score suffers as a result.

Moody's Investors Service developed the concept of the diversity score, with the intent that it would provide an accurate measurement for the risk involved with Collateralized Debt Obligations, or CDOs. A CDO is a group of debt securities that are bought and sold in one package. Any CDO possessing a good score is well-diversified and protected from any single industry taking a dive.

There are some drawbacks to using the diversity score to measure risk. The score depends upon the theory of industry correlation, which states that companies in the same industry will tend to perform in the same manner and be exposed to the same risks. In actuality, there are times when industry correlation is far from perfect. To confuse matters even more, sometimes companies in disparate industries can show correlation, meaning that risks might be spread across industries.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B. , Former Writer
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.

Discussion Comments

Jim B.

Jim B.

Former Writer

Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.