The primary purpose of portfolio diversification is to:
A)increase returns and risks.
B)eliminate asset-specific risk.
C)eliminate all risks.
D)lower both returns and risks.
E)eliminate systematic risk.

Question

Quizplus · Accepted Answer

The primary purpose of portfolio diversification is to eliminate asset-specific risk. This is achieved by spreading investments across multiple asset classes, industries, and regions, so that the performance of one investment is not dependent on the performance of another. This way, if one investment underperforms or fails, the overall impact on the portfolio is minimized. While diversification does lower risk, it does not necessarily lower returns. In fact, by diversifying, investors may be able to achieve similar returns with lower overall risk. Eliminating all risks is not possible with any investment strategy, and diversification does not aim to eliminate systematic risk (market risk).

The Primary Purpose of Portfolio Diversification Is To