Strategy Beginner: The Importance of Diversification

Test your knowledge

Choose wisely. There is only one correct answer to each question.

0%
Keep studying!
Review your answers below to learn more.
1.
Financial advisors suggest diversifying because putting your money into different investments is often the best way to avoid losing large sums of money.
Choose wisely. There is only one correct answer.
True. Diversifying spreads risk among several investments.
2.
An investor can diversify by investing in different regions of the world.
Choose wisely. There is only one correct answer.
True. One can diversify in many ways. Choosing different regions is one way.
3.
Diversification among asset classes can reduce the overall return of a portfolio because _______.
Choose wisely. There is only one correct answer.
Diversifying among different asset classes means including less-volatile assets that have lower expected earnings. Returns are averaged among all the securities in the portfolio.
4.
Risk tolerance is the amount of risk with which you are comfortable.
Choose wisely. There is only one correct answer.
True. It determines your choices of investments, among many other things.
5.
The risk of the company in which you invest being destroyed by a passing tornado is an example of _______ risk.
Choose wisely. There is only one correct answer.
Unsystematic. A tornado is a natural disaster that is unlikely to affect all industries; hence, it is an unsystematic risk.
6.
Diversifying across industries can reduce risk.
Choose wisely. There is only one correct answer.
True. Problems that befall one industry may not befall others.
7.
You have invested in a portfolio that has only two stocks. You observe that every time one stock goes up in price, the other goes down. The two stocks are _______ correlated.
Choose wisely. There is only one correct answer.
Negatively. Investments with prices that move opposite to each other are correlated negatively.