1- Diversification is a process that: reduces idiosyncratic risk by holding a hu

Question

1- Diversification is a process that:

reduces idiosyncratic risk by holding a huge number of stocks.

reduces stock returns by holding a huge number of stocks.

reduces idiosyncratic risk by holding stocks that do not move together.

reduces stock returns by investing more on risk-free assets.

reduces idiosyncratic risk by holding a huge number of stocks.

reduces stock returns by holding a huge number of stocks.

reduces idiosyncratic risk by holding stocks that do not move together.

reduces stock returns by investing more on risk-free assets.

Explanation / Answer

Diversification is a process that reduces idiosyncratic risk by holding stocks that do not move together.

Explanation

Diversification is a process of risk reduction achieved by including in the portfolio a variety of investments having returns that are less than perfectly positively correlated with each other.

Diversification works because price of different stocks do not exactly move together.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.