Final answer:
The volatility of an individual stock is generally greater than that of a well-diversified portfolio, making the statement true. Diversification helps to mitigate the risks of sharp fluctuations in stock value, as the negative impact of some stocks is balanced by others within the portfolio.
Step-by-step explanation:
The volatility of an individual stock is typically greater than the volatility of a well-diversified portfolio of stocks. The statement is true.
This is because diversification helps to spread out the risks associated with investing. Individual stocks are subject to a variety of risks including unfavorable market conditions or poor management decisions. However, when you diversify and invest in a broad range of stocks across different sectors and companies, the impact of one stock's poor performance is mitigated by the others that may perform well.
Mutual funds are a common way for investors to achieve diversification. By pooling resources and buying a wide assortment of stocks or bonds, mutual funds adhere to the wisdom of not putting all eggs in one basket. Hence, while individual stock values can fluctuate wildly, the overall volatility of a diversified portfolio is reduced, as the negative performance of some stocks is balanced by the positive performance of others.