Question

The principle of diversification tells us that

Select one:

a. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.

b. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk

c. spreading an investment across many diverse assets will eliminate some of the total risk

Answer 1

Correct option is (C)

Explanation:-Total risk is comprised of systematic risk and unsystematic risk and the principle of diversifcation says that when investment is spread across many diverse assets then we will get the reduction in unsystematic risk and therefore we can say that it will eliminate some of the total risk.

Unsystematic risk is firm specific or asset specific risk and therefore Investment is spread among many assets then this risk gets reduced .