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.
A slump in one industry can actually help other industries.
Choose wisely. There is only one correct answer.
True. In industries that meet similar needs, people may use the products or services of another industry if their preferred one experiences major problems. For instance, if there are problems in the airline industry, transportation needs may be met by driving or using trains.
2.
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.
3.
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.
4.
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.
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.
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.
7.
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.