Question

_____ involves dividing a portfolio among different classes of securities in order to preserve the capital by protecting the portfolio against negative market developments.

Answer 1

Asset Allocation involves dividing a portfolio among different classes of securities in order to preserve the capital by protecting the portfolio against negative market developments.

Studies and quantitative simulations have shown that maintaining a well-diversified portfolio of 25 to 30 stocks results in the best cost-effective level of risk reduction.

Investing in more equities results in more diversification benefits, even though they come about much more slowly.

Diversification tries to tame erratic risk occurrences in a portfolio such that the positive performance of some assets can counterbalance the negative performance of others.

Only if the assets in the portfolio are not entirely correlated—that is, if they respond to market conditions differently, frequently in opposite directions—does diversification pay off.

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