Discuss Forum
1.
Due to diversification of portfolio, the risk __
- A. Increases to some extent
- B. Increases to some extent
- C. Increases to some extent
- D. Increases to some extent
Answer: Option D
Explanation:
Due to diversification of a portfolio, the risk <<text_before_quote>>reduces<</text_before_quote>>. This is because spreading investments across various assets can balance the negative performance of one investment with the positive performance of another, lowering the overall risk.
- Reduces risk: Diversification is a key strategy for lowering the overall risk of a portfolio. By spreading investments across different assets, industries, and geographic regions, the impact of any single asset's poor performance is minimized.
- Mitigates unsystematic risk: It is particularly effective at reducing "unsystematic risk," which is the risk specific to a particular company or industry.
- Systematic risk remains: Diversification cannot eliminate "systematic risk," also known as market risk, which is the risk inherent to the entire market and affects most investments.
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