Final answer:
The false statement is that diversification involves investing in similar financial assets; it actually involves spreading investments across a variety of assets to minimize risk. Diversification relies on a mix of assets with low correlation to each other to balance the overall portfolio risk.
Step-by-step explanation:
The statement within the question that is false is 'c. diversification is a strategy to reduce risk by investing in the similar financial assets'. The correct concept of diversification in the context of a portfolio is to reduce risk by investing in a variety of financial assets, not similar ones. This means that a diversified portfolio will include a mix of stocks, bonds, mutual funds, and other investment vehicles across different industries, geographical locations, and asset classes, with the goal of minimizing the impact of any single investment's poor performance on the overall portfolio.
Diversification is fundamentally about including a wide range of investments that don't have a high correlation with each other—meaning they don't tend to move in the same direction at the same time. This is where correlation and covariance are indeed important; they are statistical measures that help to determine how closely two investments move together. High correlation means they move in a similar way, and diversifying means looking for low or negative correlation to smooth out the portfolio's returns over time.
On the topic of high risk leading to a high return, while this can be true, it is not a guaranteed outcome and involves a greater potential for loss. That's why the balance of risk and return is a fundamental consideration in building an investment portfolio.