The primary benefit of diversification is:
A) an increase in expected return.
B) an equal reduction in risk and return.
C) a reduction in risk.
D) diversification has no real benefit; it is a shell game promoted by investment advisors who are the only real winners.

Question

Quizplus · Accepted Answer

Diversification allows an investor to spread their portfolio across a range of different assets, which reduces the overall risk of their portfolio. This is because even if one asset performs poorly, the others may still perform well, helping to offset the losses. While diversification does not guarantee an increase in expected return, it can potentially improve an investor's risk-adjusted returns. Option A is incorrect because diversification is primarily used to reduce risk, not to increase expected return. Option B is incorrect because while diversification can reduce risk, it does not necessarily result in an equal reduction in returns. Option D is incorrect because diversification is a widely accepted principle in investment management and can benefit investors if implemented properly.

The Primary Benefit of Diversification Is