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The primary benefit of diversification is ______
The primary benefit of diversification is ______.
Select one:
a. an equal reduction in risk and return
b.
an increase in expected return
c. a reduce in risk
d.
Diversification has no real benefit; it is a shell game promoted by investment advisors who are the only real winners
Expert Solution
Investors face majorly two types of risk while investing. One is systematic risk and the other type is unsystematic risk. Systematic risk is the market risk which cannot be reduced by diversification. Unsystematic risk can be reduced by diversification.
a. Incorrect. Expected return is not reduced, only the unsystematic risk is reduced.
b. Incorrect. The expected return is not affected. Only the risk is reduced as unsystematic risk gets eliminated due to diversification.
c. Correct. Unsystematic risk is reduced.
d. Incorrect. Diversification reduces unsystematic risk. Investors expect to be compensated only for the systematic risk assumed.
Thus, correct answer is c.
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