Question

Which of the following is NOT a correct statement about diversification? A) As Dr. Melton stated in class, most diversification benefits are realized with just 20 to 25 stocks. B) Diversification is the process of reducing the riskiness associated with individual assets by spreading an investment across numerous assets. C) There is no limit to the amount of risk that can be eliminated through diversification. D) Non-diversifiable risk is the only risk that matters to a diversified investor. E) None of the above.

Answer 1

Answer: C. There is no limit to the amount of risk that can be eliminated through diversification.

Explanation:

Diversification is referred to as the process of reducing the riskiness associated with individual assets such that an investment is spread across numerous assets.

All the options given in the question are correct about diversification except that "There is no limit to the amount of risk that can be eliminated through diversification".

There is a limit to the amount of risk that diversification can eliminate. We should note that the risk in the investment cannot be completely eliminated no matter how the economic agent diversifies their portfolio. Even though the risks are reduced, every stock are still affected by general market risks.