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.
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.
3.
In investing language, what does it mean to diversify?
Choose wisely. There is only one correct answer.
To divide your investments among a variety of assets. This can mean different types of assets, different industries, different countries, etc.
4.
Why does diversifying across different classes of assets help reduce risk?
Choose wisely. There is only one correct answer.
Different classes of assets respond differently to economic events. Each type of asset (stocks, bonds, cash, real estate, etc.) has its own risks that may not exist for other types of assets.
5.
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.
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.
When a financial advisor says, "Let's talk about risk and how much you can deal with," he or she is talking about _______.
Choose wisely. There is only one correct answer.
Risk tolerance. Risk tolerance is the amount of risk with which you are comfortable.