The principle of diversification tells us that
A)concentrating a portfolio in three companies within the same industry will greatly reduce the overall risk of a portfolio.
B)concentrating a portfolio in two or three large stocks will eliminate all of a portfolio's risk.
C)spreading an investment across many diverse assets will eliminate all of a portfolio's risk.
D)spreading an investment across many diverse assets will lower a portfolio's level of risk.
E)spreading an investment across five diverse companies will not lower a portfolio's level of risk.

Question

Quizplus · Accepted Answer

The principle of diversification tells us that spreading an investment across many diverse assets will lower a portfolio's level of risk. While it cannot eliminate all risk, it can help to mitigate the impact of any one asset's poor performance on the overall portfolio. Concentrating in a few companies or large stocks does not provide adequate diversification and can increase risk. The specific number of companies needed to achieve adequate diversification may vary, but generally, more than five diverse companies would be recommended.

The Principle of Diversification Tells Us That