Asked by jazmyn foronda on Apr 26, 2024
Verified
Give some examples to explain how diversification actually works to reduce portfolio risk.
Diversification
The strategy of spreading investments among different financial instruments, industries, or other categories to reduce risk.
Portfolio Risk
Describes the uncertainty or variability of returns associated with a portfolio of investments, highlighting the combined risk of individual assets.
- Understand the concept of portfolio diversification and its role in reducing portfolio risk.
Verified Answer
BM
Brooke MarieMay 01, 2024
Final Answer :
Student answers will vary. All stocks possess risk due to unexpected events. By owning stocks in different industries, the odds are increased that a negative event in one industry will be offset by a positive event in another industry. These offsetting events can then help reduce the unsystematic risk.
Learning Objectives
- Understand the concept of portfolio diversification and its role in reducing portfolio risk.