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

Question

Quizplus · Accepted Answer

The principle of diversification tells us that spreading an investment across many diverse assets will eliminate some of the total risk, as it reduces the impact of any one asset's performance on the overall portfolio. However, it does not eliminate systematic risk, which is the risk inherent in the market as a whole.

The Principle of Diversification Tells Us That