Diversification and Risk

True or False: Higher risk automatically equates to higher returns.

• True

• False

Answer explanation

High levels of risk are associated with high POTENTIAL returns. There's also a possibility that you can lose just as much or more money with high-risk investments.

Match this definition to the appropriate word: A technique that reduces risk by allocating investments across various financial instruments, industries, and other categories.

• Diversification

• Risk

• Investing

• Funds

The more ____________ your stocks are, the less risk.

True or False: Stocks and bonds react the same way to adverse events.

• True

• False

Answer explanation

Stocks and bonds react differently to adverse events. This is why it's important to diversify your portfolio. It's to mitigate the loss/risk you might experience when investing.

It's important to invest in different ____________. (There is more than one correct answer.)

• Industries

• Assets

• Locations

• Credit Cards

What is the minimum amount of different stocks you should have to achieve optimal diversification?

• 15 to 20

• 5 to 10

• 35 to 50

• 100 to 500

What is another name for market risk?

• Systematic risk

• Specific risk

• Idiosyncratic risk

• Diversifiable risk

Answer explanation

Common causes of systematic/market risk are: inflation rates, exchange rates, political instability, war, and interest rates.

This might be a good thing to know. *hint hint*

True or False: Market/Systematic risk cannot be reduced through diversification.

• True

• False

Answer explanation

Systematic/Market risk affects every company. Because the causes of systematic/market risk are political, they are out of the company's control.

What is another name for diversifiable risk? (There is more than one correct answer.)

• Unsystematic risk

• Specific risk

• Idiosyncratic risk

• Market risk

True or False: Diversification won't prevent a loss.

• True

• False

Answer explanation

Diversification can't prevent a loss, but it helps reduce the impact from losses and helps maximize returns.