Question

Discuss why it is advisable to invest in a group of financial assets instead of investing in only one, even though this, on average, has offered a high historical return (generally, above the market return).

Answer 1

The reason it is advisable to invest in a group of financial assets instead of investing in one is divesification

Diversification is a technique that reduces riskby allocating investments among various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.

Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. Here, we look at why this is true and how to accomplish diversification in your portfolio.by diversifying, you're making sure you don't put all your eggs in one basket.Diversification can help an investor manage risk and reduce the volatility of an asset's price movements. Remember, however, that no matter how diversified your portfolio is, risk can never be eliminated completely.