1- Diversification is a process that: reduces idiosyncratic risk by holding a hu
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Question
1- Diversification is a process that:
reduces idiosyncratic risk by holding a huge number of stocks.
reduces stock returns by holding a huge number of stocks.
reduces idiosyncratic risk by holding stocks that do not move together.
reduces stock returns by investing more on risk-free assets.
reduces idiosyncratic risk by holding a huge number of stocks.
reduces stock returns by holding a huge number of stocks.
reduces idiosyncratic risk by holding stocks that do not move together.
reduces stock returns by investing more on risk-free assets.
Explanation / Answer
Diversification is a process that reduces idiosyncratic risk by holding stocks that do not move together.
Explanation
Diversification is a process of risk reduction achieved by including in the portfolio a variety of investments having returns that are less than perfectly positively correlated with each other.
Diversification works because price of different stocks do not exactly move together.