Question

Sometimes spreading has an advantage over hedging to lower risk because

Multiple Choice
a. It can be difficult to find assets that move predictably in opposite directions.
b. spreading increases expected returns, hedging does not.
c. It is cheaper to spread than hedge.
d. spreading does not affect expected returns.

Answer 1

Diversification is an investment strategy that involves spreading investments across different assets to lower risk. It has advantages over hedging because it can be difficult to find assets that move predictably in opposite directions, it can increase expected returns, and it can be cheaper.

Step-by-step explanation:

Diversification is an investment strategy that involves spreading investments across different assets, such as stocks or bonds, to lower risk. It can have advantages over hedging in some cases because:

1. It can be difficult to find assets that move predictably in opposite directions, which is necessary for effective hedging.
2. Diversification can increase expected returns, while hedging does not necessarily do so.
3. Spreading investments can be cheaper than hedging, as hedging often involves paying fees or creating spreads in the exchange rate.

By diversifying, investors can mitigate the impact of extreme fluctuations in the value of their investments.