Question

The primary purpose of portfolio diversification is to:

Group of answer choices

A.increase returns and risks.

B.eliminate all risks.

C.eliminate firm-specific risk.

D.eliminate systematic risk.

E.lower both returns and risks.

Answer 1

The primary purpose of portfolio diversification is to reduce the unsystematic risk which are also known as firm specific risks .

Unsystematic or firm related risk are risk associated with investment into a particular company. So As more companies are added to portfolio in form of portfolio diversification, Firm specific risk gets eliminated.

So the correct option is (C) to eliminate firm specific risk.

Portfolio diversification is for increasing return and decreasing risk so statement (A)is false.

Statement( B)and( D) are false as portfolio diversification only eliminates unsystematic risks

Statement (E) is false as it is used to maximize return not Lowering it.