ECONOMICS
RISK AND RETURN
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
|
|
|
concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
|
|
|
spreading an investment across many diverse assets will eliminate some of the total risk.
|
|
|
spreading an investment across five diverse companies will not lower the total risk.
|
Detailed explanation-1: -Answer is e. spreading an investment across many diverse assets will eliminate some of the total risk. Investors try to reduce the total risk of the portfolio by investing in a wide variety of stocks (diversification).
Detailed explanation-2: -The principle of diversification tells us that: Concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
Detailed explanation-3: -Unsystematic risk can be mitigated through diversification, and so is also known as diversifiable risk. Once diversified, investors are still subject to market-wide systematic risk. Total risk is unsystematic risk plus systematic risk.
Detailed explanation-4: -Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk.
Detailed explanation-5: -Diversification involves spreading your investment dollars among different types of assets to help temper market volatility. By “smoothing out” market performance, you may be more likely to maintain a long-term portfolio position, potentially improving your chances of meeting key investment goals.