Question

The principle of diversification tells us that:

a) concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
b) concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
c) spreading an investment across five diverse companies will not lower the total risk.
d) spreading an investment across many diverse assets will eliminate all of the systematic risk.
e) spreading an investment across many diverse assets will eliminate some of the total risk

Answer 1

Spreading an investment across many diverse assets will reduce some of the total risk.

Step-by-step explanation:

The principle of diversification tells us that spreading an investment across many diverse assets will reduce some of the total risk. By investing in a variety of assets, such as stocks from different companies or bonds from different issuers, investors can minimize the potential negative impact of any single investment performing poorly. This is because different investments will have different levels of risk, and by diversifying, investors can potentially offset losses in one asset with gains in another.