Spreading risk involves:
A) finding assets whose returns are perfectly negatively correlated.
B) adding assets to a portfolio that move independently.
C) investing in bonds and avoiding stocks during bad times.
D) building a portfolio of assets whose returns move together.

Question

Quizplus · Accepted Answer

Spreading risk can be achieved by adding assets to a portfolio that move independently of each other. This allows the portfolio to be less susceptible to the negative impact of any one asset, and can help to balance overall returns. Option A, finding perfectly negatively correlated assets, is unlikely and may not result in optimal diversification. Option C, investing in bonds and avoiding stocks during bad times, is not necessarily effective as bonds can also be subject to market volatility. Option D, building a portfolio of assets whose returns move together, will not diversify risk and may result in large losses if the entire asset class performs poorly.

Spreading Risk Involves