GE is diversified, but it doesn't diversify your stocks

— -- A: If you've been investing for a while, you've probably seen firsthand how diversification can be a big benefit.

When you put pieces of your portfolio into different types of investments, preferably pieces that don't move in lockstep with each other, your can lower your overall risk. That's one big reason investors typically put some money in stocks and some in bonds. It's also a reason why investors may be well served to put some of their money in stocks of foreign companies.

Since General Electric is involved in so many businesses, from aircraft engines to banking and appliances, you might think the stock would move in lockstep with large U.S. companies.

For that and other reasons, adding GE stock to a portfolio that already owns large U.S. stocks doesn't add much value on a risk-adjusted basis.

Here's why: First, it would be hard to have a diversified basket of large U.S. stocks that doesn't already include GE. GE is a member of the Standard & Poor's 500, the Dow Jones industrial average and the Russell 1000 indexes.

Also, if you factor in GE's dividend yield of 3.8%, GE's returns stay pretty close to the Standard & Poor's 500's. Last year, for instance, GE returned 3.4% after you add in the dividend yield, not far from the S&P 500's 5.5% total return.

That's not to say there aren't some years where GE and the S&P 500 part ways. In 2004, GE generated a return 21.6%, again adding in the 3.8% current dividend yield, versus the 10.9% return of the S&P 500.

But generally speaking, your hunch is correct: GE's stock moves closely to that of large U.S. stocks as a group. Using Excel, we learn GE and the S&P 500 have a correlation of 0.86. That means they're pretty closely tied together, considering that assets with a correlation of 1 move in lockstep and those with correlations of -1 move as a mirror image.