Products & Their RisksQuestion 143 of 398
The primary purpose of diversifying a portfolio is to:
a.Guarantee a positive return every year
b.Eliminate systematic (market) risk
c.Increase the portfolio's beta above the market
d.Reduce unsystematic risk by spreading investments across different securities and sectors
Explanation
Diversification spreads money across different companies, industries, and asset classes so that a bad outcome in one holding does not devastate the whole portfolio. This reduces unsystematic (company-specific) risk. It cannot remove systematic risk, which affects the entire market, nor can it guarantee positive returns.
Practice all 398 questions free — no signup required.
Related questions on this topic
Last reviewed: · editorial process
PrepPass Editorial Team · Verified against FINRA Securities Industry Essentials (SIE) Exam · How we review