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.
Diversification helps to reduce risk because _______.
Choose wisely. There is only one correct answer.
Different investments perform differently. The idea behind diversification is that the changes in differently performing investments will cancel each other out.
2.
How does having a lot of money affect your risk tolerance?
Choose wisely. There is only one correct answer.
It can enable you to afford loss. If you have a lot of money, you can afford to lose some, and so your risk tolerance will increase.
3.
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.
4.
Diversifying your stock portfolio among different companies or _______ can reduce risks that are specific to a company.
Choose wisely. There is only one correct answer.
Industries. Sometimes, a problem that hits one company in an industry can hit others in that industry.
5.
A fall in price of one security in a diversified portfolio may be offset by an increase in price of another.
Choose wisely. There is only one correct answer.
True. Problems in one industry may lead people to seek the products or services of another in your portfolio.
6.
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.
7.
The chance of experiencing inflation is an example of unsystematic risk.
Choose wisely. There is only one correct answer.
False. Inflation influences all companies as well as the entire economy. Diversification cannot eliminate the risk of facing inflation. Therefore, it is a systematic risk.