The principle of diversification tells us that:
A)concentrating an investment in three companies all within the same industry will greatly reduce your overall risk.
B)concentrating an investment in two or three large stocks will eliminate all of your risk.
C)spreading an investment across many diverse assets will eliminate some of the risk.
D)spreading an investment across many diverse assets will eliminate all of the risk.
E)spreading an investment across five diverse companies will not lower your overall risk at all.

Question

Quizplus · Accepted Answer

The principle of diversification tells us that spreading an investment across many diverse assets will eliminate some of the risk. However, diversification cannot completely eliminate all types of risk, such as market risk or systemic risk. It can only reduce the specific risk associated with individual assets. It is important to note that simply spreading an investment across a few different companies in the same industry (option A) or a few large stocks (option B) may not provide adequate diversification. Similarly, diversifying across only five companies (option E) may not sufficiently reduce overall risk.

The Principle of Diversification Tells Us That