The Principle of Diversification Tells Us That

question 116

Multiple Choice

The principle of diversification tells us that:

• A)concentrating an investment in two or three large shares will eliminate all of your risk.
• B)concentrating an investment in three companies all within the same industry will greatly reduce your overall risk.
• C)spreading an investment across five diverse companies will not lower your overall risk at all.
• 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:

Owner's Equity

Owner's equity represents the owner's claim to the assets of a business, calculated as the business's total assets minus its total liabilities.

Salvage Value

is the estimated residual value of an asset at the end of its useful life.

Depreciation Expense

The allocated amount of an asset's cost expensed over its useful life to account for wear and tear, obsolescence, or decline in value.