Diversification is the principle of:
A) eliminating risk.
B) reducing the risk we carry to just two.
C) holding more than one asset to reduce risk.
D) eliminating investments from our portfolio that have idiosyncratic risk.

Question

Quizplus · Accepted Answer

Diversification is the practice of spreading your investments among different classes of assets to reduce risk. By doing so, you are less likely to experience a substantial loss from any one investment. Holding more than one asset has been shown to be an effective way to reduce the overall level of risk in a portfolio. Answer A is incorrect because diversification does not eliminate risk completely. Answer B is incorrect because diversification involves holding more than two assets. Answer D is incorrect because diversification involves holding a variety of investments, rather than eliminating them.

Diversification Is the Principle Of