Question

In what situation is Portfolio diversification least likely to protect against losses?

In what situation is Portfolio diversification least likely to protect against losses?

Homework Answers

Answer #1

Portfolio diversification is least likely to protect against losses in following situations,-

A. When there is perfect positive correlation between various stocks in the portfolio and diversification is low

B. When there is systematic risk present and loss happens due to systematic risk and it can never be negated through portfolio diversification

C. when there is a Black swan event in the economy, the portfolio diversification will not help

D. When there is sudden political change in the system, the portfolio is bound to correct

basically it can be said that systematic risk which is market risk is not diversifiable and hence diversification cannot protect against systematic risk.

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