Which of the following is the best deﬁnition of principle of diversiﬁcation?
A) A theory showing that the expected return on any risky asset is a linear combination of various factors.
B) A risk that affects at most a small number of assets. Also called unique or asset-speciﬁc risks.
C) A risk that inﬂuences a large number of assets. Also called market risk.
D) Positively sloped straight line displaying the relationship between expected return and beta.
E) Principle stating that spreading an investment across a number of assets eliminates some, but not all, of the risk.

Question

Quizplus · Accepted Answer

The principle of diversification states that spreading investments across a number of assets can reduce overall risk. However, it does not eliminate all risk as some specific risks may still affect individual assets.

Which of the Following Is the Best Deﬁnition of Principle