Which of the Following Statements Is MOST Correct Concerning Diversification

question 136

Multiple Choice

Which of the following statements is MOST correct concerning diversification and risk?

• A) Diversification is mainly achieved by the selection of individual securities for each type of asset held in a portfolio.
• B) Diversification is mainly achieved by the asset allocation decision, not the selection of individual securities within each asset category.
• C) Large company stocks and small company stocks together in a portfolio lead to dramatic reductions in risk because their returns are negatively correlated.
• D) Asset allocation is important for pension funds but not for individual investors.

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Definitions:

Capital Leases

A lease that transfers substantially all risks and rewards of ownership of the asset to the lessee, effectively treated as a purchase.

Operating Leases

Leases where the lessor retains ownership of the asset, and the asset is returned after the lease term; typically involves equipment and property.

Direct Financing Capital Lease

A type of lease in which the lessor finances the leased asset, and all risks and rewards of ownership are transferred to the lessee, without actual transfer of ownership.

Finance Lease

A type of lease in which the lessee effectively takes on all the risks and rewards of ownership, though legally the asset remains owned by the lessor.