Diversification reduces the risk of a portfolio because and some of the risks are averaged out of the portfolio.

Question

Quizplus · Accepted Answer

Diversification helps to reduce the risk because share prices do not move identically, meaning that some stocks may go up while others go down, resulting in an overall average movement that is less volatile. A and B are incorrect because diversification does not eliminate all risks, and some risks are specific to individual firms or are unrelated to market movements. D is also incorrect because while share prices may be unpredictable, diversification still helps to mitigate some of the risk associated with unpredictable movements.

Diversification Reduces the Risk of a Portfolio Because and Some