A diversified portfolio of securities is characterized by:
A) dissimilar risk-return characteristics of the financial instruments.
B) concentration on a single industry that has the highest growth rate.
C) erratic loss potential due to investment in the latest financial vehicles.
D) unstable earnings for the entire investment horizon.
E) investing in a single security that has the lowest risk and the highest returns.

Question

Quizplus · Accepted Answer

A diversified portfolio of securities is characterized by dissimilar risk-return characteristics of the financial instruments in order to spread out risk among different types of investments. Concentration on a single industry or investment type creates higher risk potential and unstable earnings. Erratic loss potential is also not desirable in a diversified portfolio. Investing in a single security with the lowest risk and highest returns may not provide enough diversification to adequately manage risk.

A Diversified Portfolio of Securities Is Characterized By