Question

A diversified securities portfolio is characterized by:

A) Dissimilar risk and return characteristics of the securities.
B) Concentration on a single industry which has the highest growth rate.
C) Erratic loss potential due to investment in latest financial vehicles.
D) Unstable earnings for the entire investment horizon.
E) Investing in a single security which has the lowest risk and the highest returns.

Answer 1

A diversified securities portfolio involves investing in a wide range of securities to reduce risk and buffer against negative events. However, it does not guarantee stable earnings or eliminate losses entirely.

Step-by-step explanation:

A diversified securities portfolio is characterized by investing in a wide range of securities, such as stocks or bonds from different companies. This strategy helps to reduce risk by spreading investments across different assets. By doing so, the portfolio is not dependent on the performance of a single security or industry.

For example, if an investor only holds stocks from a single industry and that industry experiences a decline, the entire portfolio could suffer significant losses. However, by diversifying across different industries, there is a higher chance of buffering the impact of any negative events on the overall portfolio.

Diversification does not guarantee stable earnings or eliminate the potential for losses. It helps to reduce the impact of extreme increases and decreases in value, but it does not eliminate volatility entirely.