The purpose of diversification is to
A) reduce the volatility of a portfolio's return.
B) raise the volatility of a portfolio's return.
C) reduce the average return on a portfolio.
D) raise the average return on a portfolio.

Question

Quizplus · Accepted Answer

The purpose of diversification is to reduce the volatility of a portfolio's return by spreading the investments across different asset classes, industries, and markets. This helps to limit the impact of any one investment on the overall performance of the portfolio, reducing the risk of significant losses. While diversification may also lead to a slightly lower average return compared to a more concentrated portfolio, this trade-off is generally considered acceptable for investors seeking a more stable and predictable return.

The Purpose of Diversification Is to