Due to the magic of diversification, the risk associated with the assets of a firm must be less than the risk associated with the financing, or debt and equity that a firm is utilizing for its assets.

Question

Quizplus · Accepted Answer

Diversification helps to reduce the overall risk of a portfolio by spreading investments across multiple assets. However, the risk associated with financing (debt and equity) is not necessarily lower than the risk associated with the assets of a firm. In fact, high levels of leverage can increase the overall risk of a firm, even if the assets themselves are diversified.

Due to the Magic of Diversification, the Risk Associated with the Assets