What is the reduction of risk achieved by holding numerous securities in an asset portfolio called__________?
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Answer: A. diversification
Explanation
Diversification lowers overall portfolio risk by combining uncorrelated assets. Holding numerous securities reduces exposure to individual company failures. Unsystematic risk is minimized through effective multi-asset portfolio strategies. Modern portfolio theory demonstrates the mathematical benefits of diversification. Asset correlation measures how two different securities move relative together. Systematic risk remains present even in a fully diversified investment portfolio.
Mutual funds and index funds provide individual investors instant diversification. Retirement planners advocate diversified holdings to protect long-term savings. Risk-averse investors build broad portfolios to smooth out return volatility. Selling ability relates to market liquidity rather than risk reduction. Reduction ability is a generic phrase rather than a recognized financial term. Director ability refers to corporate governance instead of portfolio management.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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