Which of the following statements is true?

Question

Quizplus · Accepted Answer

Diversification allows you to have the same expected return with less risk exposure by spreading your investments across different assets, classes or sectors. While it may not necessarily increase your expected return, it can help lower your risk by mitigating the impact of individual asset volatility or market fluctuations. In a diversified portfolio, assets' returns are not perfectly positively correlated, but rather positively or negatively correlated to differing degrees. Diversification does not reduce both your expected return and your risk. By holding a diversified portfolio, an investor can achieve the same expected return with less risk exposure, as the returns of different assets are not perfectly positively correlated. Diversification does not necessarily increase the expected return, but it can reduce the overall risk of the portfolio. Therefore, option B is the correct statement. Option A is incorrect because diversification does not necessarily increase the expected return; it mostly reduces the risk. Option C is incorrect because diversification involves holding a mix of assets with varying degrees of correlation, not perfectly positively correlated. Option D is incorrect because diversification reduces risk, but not necessarily the expected return.

Which of the Following Statements Is True