Question

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless.
True or False?

Answer 1

Answer:

The correct answer is False.

Explanation:

Diversification is a method to reduce the risk of our portfolio by investing in different assets. Its main objective is to improve the profitability we obtain in relation to the risk we assume. By investing in assets that react differently to possible future scenarios, we can avoid extreme situations in our portfolio.

Although diversification does not ensure that we will not lose money, it is one of the main tools we can use to improve the long-term return on risk / return

Non-diversifiable risk, also called systemic risk, is that which is associated with the market as a whole. It is a risk that does not affect any particular company or asset, but when it occurs affects all the assets of a market. Examples of this type of risk would be increases in interest rates, inflation, wars, changes in government, etc. In short, we are talking about a type of risk that the investor must assume as inherent in the activity of investing. We cannot eliminate this risk through diversification.

Diversifiable risk, also known as non-systemic risk, is the specific risk to each company or asset in which we can invest. The most common sources of this type of risk are business risk and the financial risk of bankruptcy of a specific asset. As prudent investors, we can use diversification to limit the impact that such events can have on all our investments.