Diversification reduces the risk of a portfolio because share prices do not move identically and some of the risks are averaged out of the portfolio.

Question

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By holding a diversified portfolio of stocks, an investor is less susceptible to the risk of a single stock or a few stocks performing poorly since the returns of different stocks in the portfolio are not perfectly correlated. This diversification helps to average out the risks of the portfolio, making it less volatile overall.

Diversification Reduces the Risk of a Portfolio Because Share Prices