Question

Which of the following statements about diversification is TRUE?
A. Diversification is an investment strategy where you invest
all your money in one industry.
B. Diversification helps you analyze how companies are doing
in the stock market.
C. Diversification guarantees your investment portfolio will be
profitable
D. Diversification is an investment strategy that mixes a wide
variety of investments from different categories within a
portfolio

Answer 1

Answer:

Explanation:

Diversification is an investment strategy that involves the spreading of assets in different investment classes and categories.  In diversification, the investor opts to invest in different investment tools as opposed to investing in a single asset. Diversification is a risk management tool that safeguards an investor from huge losses should the market behave against expectations.

In diversification, the investor will have different classes of assets that react independently to market events in his portfolio. The purpose is to minimize losses should some assets perform poorly. By diversifying, investors are assured of returns from some, if not all, assets in the portfolio.

Answer 2

The correct statement is that diversification is an investment strategy that mixes a wide variety of investments from different categories within a portfolio. So, the correct option is D.

Diversification is a beneficial method used to divide the risks and returns over the portfolio of an individuals into different class of assets over a long period of time.

• The diversification method is used by investors to minimize the risks associated with one single class of assets investment over a long period of time.

• If an individual invests 100% of his money into stock market and the market experiences a crash, there are more chances of losses in such single class of assets investment.

• A proper diversification as per risk profile would mean that the money is invested in different sectors like Stock markets, Fixed deposits, Gold, Mutual funds, debentures, bonds, real estate, etc.

Hence, the correct option is D that the diversification is an investment strategy that mixes a wide variety of investments from different categories within a portfolio.

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