The primary purpose of portfolio diversiﬁcation is to:
A) Increase returns and risks.
B) Eliminate all risks.
C) Eliminate asset-speciﬁc risk.
D) Eliminate systematic risk.
E) Lower both returns and risks.

Question

Quizplus · Accepted Answer

The primary purpose of portfolio diversification is to eliminate asset-specific risk by investing in a variety of assets rather than just one or a few. By diversifying, an investor lowers their exposure to any one asset's unique risks and increases the likelihood that their overall portfolio will remain stable, even if one or a few of the investments in the portfolio decline in value. It is not possible to eliminate all risks through diversification, nor is it advisable to try to eliminate systematic risk, which is a type of risk that affects the entire market or economy.

The Primary Purpose of Portfolio Diversiﬁcation Is To