The Principle of Diversification Tells Us That

question 179

Multiple Choice

The principle of diversification tells us that:

• A) Concentrating an investment in two or three large stocks will eliminate all of your risk.
• B) Concentrating an investment in two large stocks will cut your risk exactly in half.
• C) Spreading an investment across many diverse assets cannot (in an efficient market) eliminate any risk.
• D) Spreading an investment across many diverse assets will eliminate all of the risk.
• E) Spreading an investment across many diverse assets will eliminate some of the risk.

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Definitions:

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A statistical method used to describe variability among observed, correlated variables in terms of a potentially lower number of unobserved variables, called factors.

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A research method involving the detailed examination of a single case or cases, often used in psychology, business, or social sciences.

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