Why would diversifying your investments reduce your risk? Give a brief example of this.

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Expert Solution

Diversification is a strategy which helps in reduction of risk.it is always advisable to diversify in order to reduce the risk of a portfolio.

portfolio management is not complete without diversification of risk and diversification of investment. Diversification means a process of allocating assets into different classes and different risk exposure so that the overall risk related to the portfolio is minimised and the return making capacity of the portfolio is enhanced to the largest possible extent with the lowest possible risk.

there are two type of risk which are associated with portfolio management. They could be systematic risk and unsystematic risk so diversification is preferred in unsystematic risk most, because unsystematic risk is the risk which are related to specific firm or industry and as more and more of the companies are allocated and added to the portfolio, the risk get minimised and it can be completely eliminated also.

Systematic risk is related to the market based and it cannot be completely eliminated but with the help of the diversification, this type of risk can also be minimised to a largest possible extent.it is a rational decision always to minimise the risk and maximize the return by diversifying the portfolio

jeff jeffy answered 1 year ago

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