The Principle of Diversification Tells Us That

question 71

Multiple Choice

The principle of diversification tells us that:

• A) concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
• B) concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
• C) spreading an investment across five diverse companies will not lower the total risk.
• D) spreading an investment across many diverse assets will eliminate all of the systematic risk.
• E) spreading an investment across many diverse assets will eliminate some of the total risk.

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Definitions:

Profit-Maximizing

A strategy or approach aimed at achieving the highest possible profit from operations, often involving minimizing costs and maximizing revenues.

Negative Externality

A negative externality exists when a product or decision results in a negative effect on a third party not directly involved in the transaction.

Positive Externality

A benefit that affects someone who did not choose to incur that benefit, often associated with public goods or services.

Profit-Maximizing

The process or strategy employed by businesses to determine the price and output level that delivers the maximum possible profit.