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

Question

Quizplus · Accepted Answer

Diversification does not eliminate risk entirely, but rather spreads it out over a portfolio of assets. The risk associated with the financing (debt and equity) remains the same regardless of diversification. In fact, diversification can actually increase the overall risk of a portfolio if the assets are not properly selected and diversified.

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