The Principle of Diversification Tells Us That

question 23

Multiple Choice

The principle of diversification tells us that:

• A)concentrating an investment in two or three large stocks will eliminate all 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.
• D)spreading an investment across many diverse assets will eliminate all the risk.
• E)spreading an investment across many diverse assets will eliminate idiosyncratic risk.

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Definitions:

Coase Theorem

A principle that asserts that if private parties can bargain over the allocation of resources without cost, they can solve the problem of externalities on their own.

Externalities

Economic outcomes that impact third parties not directly involved, which can either be advantageous or disadvantageous.

Significant Costs

Expenses that are sufficiently large to impact an entity's financial decisions or financial statements.

Externalities

Economic impacts of a product or service on parties who do not directly participate in the transaction, which can be negative (pollution) or positive (vaccination benefits).