Diversification is the principle of distributing investments over multiple asset classes and assets within those asset classes. When you invest in Cashare Loans, each loan has a certain probability of default that is dependent on the rating. In general the higher the return is the higher the risk associated with that asset is.
Let's say you were to invest CHF 10'000 in a loan with rating C. If this loan were to default right away you would endure a total loss of your invested capital. On the other hand if you were to invest in 100 loans with an amount of CHF 100 you would also have invested CHF 10'000 in total. If we assume an average interest rate of 9.5% that would translate in yearly interest payments of CHF 950. If one or two loanees were to default and you were to receive a certificate of loss you would still have a return of 7% to 9%, depending on when the loanees default i.e. how much of the loan was already repaid. It is therefore favorable to invest in multiple loans to mitigate the risk of total loss.
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