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:

Cent

A monetary unit equal to one hundredth of a larger unit, such as a dollar or euro.

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A unit of mass equal to one thousandth of a gram, used primarily to measure small quantities of material.

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The digits in a number that are meaningful in terms of accuracy and precision, often used in scientific measurements.

Percent

A part per hundred used in expressing ratios, fractions, or portions of a whole.