Question

Investors can reduce risk by holding more than one asset in a portfolio. True or False?

Answer 1

The given statement is completely true that "Investors can reduce risk by holding more than one asset in a portfolio".

Holding more than one asset in a portfolio in order to reduce the risk is known as Diversification of risk.

Every asset (security here) react differently in same market event i.e. each security have different beta, which is a measure of risk.

In case of negative beta, the relationship of security with market is inverse and in case of positive beta, the relationship of security with market is direct.

So, in case of negative beta, when market goes upward the security goes downward and vice versa.

and in case of positive beta, when market goes upward the also price also rises and vice versa.

So, by choosing the favourable securities i.e. by diversification in the given circumstances in the market, the investor can reduce the risk of his investment.