Which of the following statements is MOST correct concerning diversification and risk?
A) Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
B) Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.
C) Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.
D) Proper diversification generally results in the elimination of risk.

Question

Quizplus · Accepted Answer

Diversification can reduce risk by spreading it across different assets or sectors. By investing in companies from different industries, the correlation of returns is lessened and a decrease in overall portfolio risk can be achieved. However, it is important to note that complete elimination of risk is not possible through diversification.

Which of the Following Statements Is MOST Correct Concerning Diversification