The Principle of Diversification Tells Us That

question 198

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:

Accounting Equation

The fundamental equation of double-entry bookkeeping: Assets = Liabilities + Equity.

Note Receivable

A written promise to pay a specified amount of money, with interest, by a certain date.

Adjusting Entry

An accounting journal entry made at the end of an accounting period to allocate income and expenditure to the correct period.

Interest Payment

The amount paid by a borrower to a lender as a charge for borrowing money, usually expressed as an annual percentage of the principal amount.