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 is a technique to reduce risk by investing in a variety of assets that are not strongly related to each other. If all the companies in a portfolio come from the same industry, the portfolio is more exposed to industry-specific risks. On the other hand, if a portfolio contains companies from different industries, the correlation of their returns is usually lower, and the portfolio is more diversified. Therefore, risk-averse investors often select companies from different industries to diversify their portfolio and reduce risk.

Which of the Following Statements Is Most Correct Concerning Diversification