Diversification Whose Sole Impact Is to Reduce the Variability of Profits

question 10

Multiple Choice

Diversification whose sole impact is to reduce the variability of profits does not create value for shareholders because:

• A)Shareholders are interested in return more than in risk
• B)The most important risks (such as a global financial crisis or the collapse of the Euro)are systemic in nature,against which diversification offers little protection
• C)The risk which is relevant to stock market valuations is perceived risk--this bears little relationship to profit variability
• D)If investors can spread risk by diversifying their portfolios,diversification adds no additional value in terms of risk spreading.

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Definitions:

Evolutionary Validity

The extent to which findings and theories in psychology are consistent with evolutionary principles and the history of human development.

Within-subjects Design

An experimental design in which the same subjects are exposed to all conditions or treatments, minimizing variability among participants.

Between-subjects

A research design where different subjects are assigned to each of the experimental conditions, ensuring individual variables do not influence the outcome.