CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

Select the correct statement(s) about the benefits of portfolio diversification.

I. Portfolio diversification helps investors avoid disastrous investment outcomes.
II. Investors can use portfolio diversification to spread out investment risks.
III. Portfolio diversification can be used to reduce risk and in the mean time increase the expected rate of return.
Correct Answer: I

User Contributed Comments 9

User Comment
jchase II: ALL is wrong. It can spread away SOME risks, not all.
III: not increasing returns, but maintaining the return levels.
thekobe good observations jchase, we have to put attention to those issues
johntan1979 Thanks jchase. Just to add to III, the answer is in the reading:

"Portfolio theory is used to maximize an investment's expected rate of return for a given level of risk, or minimize the level of risk for a given expected rate of return."

You CAN'T expect BOTH, as suggested by III.
ankurwa10 i have a doubt. Doesn't diversification allow for those outcomes that are disastrous to be mitigated/made up by those outperform. So, technically, even I should not be correct?
ascruggs92 ankurwa10, what you just said is exactly why I is correct. The idea is that poor performance by some investments will be mitigated by good performance by others. This prevents disasters from ruining your entire portfolio
FozzeyBear I is incorrect as well. Disastrous investments will happen regardless of diversification. For example investing in a diversified market index in 2008 still was a disastrous investment
maya @FozzeyBear: I is correct. The market may go down, and you may lose money because of the market crash, but diversifying your portfolio is still a good investment choice.
chesschh maya is correct, its about reducing risk, not getting rid of it.
clarencecc I think I is wrong too, diasterous outcomes cannot be avoided if the market collapses.
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