A diversified portfolio should be diversified between asset classes such as stocks, bonds, and cash alternatives to name a few. And to take it a step further, a diversified portfolio should be diversified within asset classes such as a diverse basket of stocks.
For instance, say your stock portfolio included a software developer company, an internet service provider and a social media company. Although the portfolio has spread its risk among three companies, it may not be considered well diversified since all the companies are connected to the technology industry. A portfolio with an information technology company, a health care company and a consumer discretionary company may be considered more diversified.