Which of the Following Is an Example of Risk Diversification

question 13

Multiple Choice

Which of the following is an example of risk diversification?

• A) an insurance company writing earthquake insurance only for the Los Angeles area
• B) an individual investing all of her savings in a single, new firm
• C) an individual purchasing only IBM stock
• D) a lumber mill purchasing trees from various forests across the western United States

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Definitions:

Stock Market

A public market for the trading of company stock and derivatives at agreed upon prices.

Economic Value Added

A measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit.

Residual Income

Another term for economic value added (EVA).

Opportunity Costs

The cost of foregone alternatives when a decision is made, representing the benefits an individual, investor, or business misses out on when choosing one alternative over another.