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

Diversification reduces risk by spreading investments across various financial instruments, industries, and other categories. It aims to maximize return by investing in different areas that would each react differently to the same event. Although it can't eliminate all risk (especially systematic risk inherent in the market), it can significantly reduce unsystematic risk, which is specific to a single asset or industry.

The Principle of Diversification Tells Us That