Final answer:
The answer is true; diversifying your investments protects against the risks associated with inaccurate financial statements by spreading the risk among different assets, thus mitigating the impact on the entire portfolio.
Step-by-step explanation:
Diversifying your investments can indeed protect you to some degree from the problems associated with misleading financial statements from some companies. The answer to the question is true. When you diversify, you spread your investments across various sectors and companies, which helps to mitigate the risks associated with any one company's potential downfall due to, among other things, inaccurate financial reporting.
Diversification follows the principle of not putting all your eggs in one basket, effectively reducing the impact of extreme fluctuations in the value of a single investment. For instance, while one company might experience a decline in stock value due to misleading financial statements, another might perform better than expected, thus balancing your portfolio.
Investing in mutual funds is one way to achieve diversification, as these funds typically hold a range of securities that represent different sectors of the stock market.
However, it's important to note that while diversification can help protect against company-specific risks, it does not completely eliminate market risk. For example, during the market downturn of 2008, the value of diversified U.S. stock funds still declined by 38%, showing that market-wide events can affect diversified portfolios as well.