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.
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.
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.
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.
4.
A portfolio with negatively correlated assets reduces volatility.
Choose wisely. There is only one correct answer.
True. When some assets fall in value, others will rise in value, and vice versa.
5.
Which of the following can reduce volatility in investing?
Choose wisely. There is only one correct answer.
Negative correlation of securities. A fall in one type of security can be offset by a rise in another.
6.
Investment portfolios can be called efficient when they ________.
Choose wisely. There is only one correct answer.
Contain the best possible mixes of assets for a specific risk level and return. Efficiency is relative to the kind of objective that you are trying to fulfill.
7.
Diversifying across industries can reduce risk.
Choose wisely. There is only one correct answer.
True. Problems that befall one industry may not befall others.