The principle of diversiﬁcation tells us that:
A) Concentrating an investment in two or three large stocks will eliminate all of your risk.
B) Concentrating an investment in two large stocks will cut your risk exactly in half.
C) Spreading an investment across many diverse assets cannot (in an eﬃcient market) eliminate any risk.
D) Spreading an investment across many diverse assets will eliminate all of the risk.
E) Spreading an investment across many diverse assets will eliminate some of the risk.

Question

Quizplus · Accepted Answer

The principle of diversification tells us that spreading an investment across many diverse assets will eliminate some of the risk. It is not possible to eliminate all risks, but having a portfolio with diverse assets helps to reduce the overall risk. This is because different assets tend to perform differently under various economic conditions or events. By spreading out our investments, we can reduce the impact of any one asset underperforming or experiencing a significant loss.

The Principle of Diversiﬁcation Tells Us That