Multiple Choice
Users of accounting information can be divided into two main groups. These groups include:
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1. Introduction to Accounting
Types of Accounting
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The most important reason to diversify a portfolio is to:
A
Increase the total number of transactions for higher brokerage commissions
B
Maximize returns by investing only in high-risk assets
C
Reduce the overall risk by spreading investments across different assets
D
Ensure all investments are in the same industry for specialization
Verified step by step guidance1
Understand the concept of portfolio diversification: Diversification involves spreading investments across various assets, industries, or geographic regions to reduce the overall risk of the portfolio.
Recognize the primary goal of diversification: The main purpose is to minimize the impact of poor performance in one asset or sector by balancing it with better performance in others.
Evaluate the incorrect options: Increasing transactions for higher brokerage commissions does not benefit the investor, and investing only in high-risk assets increases risk rather than reducing it.
Analyze the correct option: Reducing overall risk by spreading investments across different assets aligns with the principle of diversification, as it helps achieve a balanced risk-return profile.
Conclude the reasoning: Diversification is a risk management strategy that ensures the portfolio is not overly dependent on the performance of a single asset or industry, thereby protecting the investor from significant losses.
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