Which of the following statements is most correct concerning diversification and risk?
A) Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.
B) Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.
C) Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated.
D) Asset allocation is important for pension funds but not for individual investors.

Question

Quizplus · Accepted Answer

Diversification is mainly achieved through asset allocation, which involves investing in different categories of assets (such as stocks, bonds, and cash) that have different risk and return characteristics. Investing in a variety of individual securities within each asset category can also help to further diversify the portfolio, but the primary focus should be on asset allocation. Choice A is incorrect because diversification is not just about selecting individual securities within each asset category. Choice C is incorrect because while including different types of stocks in a portfolio can lead to diversification benefits, the correlation between large and small company stocks is not consistently negative. Choice D is incorrect because asset allocation is important for both pension funds and individual investors.

Which of the Following Statements Is Most Correct Concerning Diversification