Question

Diversification tends to increase portfolio performance, because:____.

A. Diverse portfolios have a higher expected return.
B. Diverse portfolios have a lower volatility.
C. The assets in a diverse portfolio are perfectly correlated.
D. A diverse portfolio is more likely to have a stock inside of it that performs amazingly well.

Answer 1

D. A diverse portfolio is more likely to have a stock inside of it that performs amazingly well.

Step-by-step explanation:

Diversification of portfolio means adding different stocks / shares in investment portfolio.

Option D is correct because when we have different kind of stock, there are chances that if one fails to perform, one can outperform and it is likely to have a stock which can perform amazingly well.

Now we will see that why all the options are incorrect one by one.

option A is not true because it is not necessary that diverse portfolio cannot fail altogether. So it cannot be guaranteed that it will have higher return for sure.

Option B is not true as diverse portfolio cannot have lower volatility if all perform like same.

Option C is also incorrect as correlation is not necessary in diverse portfolio.