The main reason for diversifying a portfolio is
A)to take advantage of the fact that returns on assets are imperfectly correlated.
B)to take advantage of the favorable tax treatments diversified portfolios receive from the federal government.
C)that diversified portfolios have greater liquidity than undiversified portfolios.
D)that diversified portfolios have lower information costs than undiversified portfolios.

Question

Quizplus · Accepted Answer

Diversifying a portfolio helps to reduce the overall risk by investing in a variety of assets from different industries, regions, and asset classes. This means that the returns on one asset may not be affected by the performance of another, leading to a reduction of overall portfolio risk. This is known as imperfect correlation and is the main reason for diversifying a portfolio. The other options listed are not valid reasons for portfolio diversification.

The Main Reason for Diversifying a Portfolio Is