The main reason for diversification for an investor is:
A)To take advantage of the fact that returns of assets are perfectly positively correlated
B)To take advantage of the fact that returns on assets are not perfectly positively correlated
C)To lower transaction costs
D)To gain from the greater returns that come from greater risk

Question

Quizplus · Accepted Answer

Diversification is the strategy of spreading investments across different assets to reduce risk. One of the main reasons for diversification is that returns on assets are not perfectly positively correlated. This means that when one asset is performing poorly, another asset may be performing well, which can help to balance out losses and maximize overall returns. Option A is incorrect because returns of assets are not perfectly positively correlated, which is why diversification is necessary. Option C is incorrect because while diversification may help lower transaction costs by reducing the need for frequent buys and sells, it is not the main reason for diversification. Option D is incorrect because while greater returns may come from greater risk, diversification is a risk management strategy that typically aims to reduce overall risk in a portfolio.

The Main Reason for Diversification for an Investor Is