Multiple choice

Diversification reduces

  1. Company specific risk

  2. Market risk

  3. Both of the above

  4. None of the above

Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Diversification reduces company-specific (unsystematic) risk by spreading investments across different companies. When one company underperforms, others may compensate. However, market risk (systematic risk) affects all companies and cannot be diversified away.