Diversification in investment refers to:
A) Concentrating investments in a single asset
B) Spreading investments across multiple assets
C) Buying high-risk assets only
D) Selling off assets during market downturns
Answer: B
The main goal of diversification is to:
A) Increase risk
B) Decrease risk
C) Guarantee high returns
D) Avoid taxes
Answer: B
Which of the following is a potential benefit of diversification?
A) Increased exposure to individual asset risk
B) Reduced exposure to market risk
C) Higher transaction costs
D) Decreased liquidity
Answer: B
True or False: Diversification eliminates all types of risk.
A) True
B) False
Answer: B
Diversification across different asset classes typically includes:
A) Investing only in stocks
B) Investing in bonds and commodities
C) Investing in foreign currencies
D) Investing in a single sector
Answer: B
Which of the following is an example of asset class diversification?
A) Investing in multiple technology stocks
B) Investing in stocks of different sectors
C) Investing in different companies within the same industry
D) Investing in real estate and gold
Answer: D
Company-specific risk can be reduced by:
A) Investing in a single company
B) Diversifying across different industries
C) Focusing on high-risk assets
D) Selling off investments frequently
Answer: B
Sector rotation is a strategy that involves:
A) Concentrating investments in a single sector
B) Periodically shifting investments among different sectors
C) Avoiding investment in any specific sector
D) Investing only in emerging sectors
Answer: B
Which of the following is a disadvantage of over-diversification?
A) Increased risk exposure
B) Higher transaction costs
C) Easier management of investments
D) Higher tax liabilities
Answer: B
True or False: Diversification ensures high returns on investments.
A) True
B) False
Answer: B
Geographic diversification involves:
A) Investing in companies headquartered in the same city
B) Investing in companies from different countries
C) Investing in companies from the same region
D) Investing in companies from the same industry
Answer: B
A well-diversified portfolio should ideally:
A) Have investments with similar risk profiles
B) Include only speculative assets
C) Include assets with low correlations
D) Focus on short-term gains
Answer: C
Which of the following statements is true about diversification?
A) It reduces the impact of systematic risk
B) It increases the impact of unsystematic risk
C) It eliminates all types of risk
D) It guarantees high returns
Answer: A
Investing in index funds is an example of:
A) Concentrated investment strategy
B) Diversified investment strategy
C) Speculative investment strategy
D) Sector-specific investment strategy
Answer: B
Currency diversification involves:
A) Investing in a single currency
B) Investing in multiple currencies
C) Avoiding investment in any currency
D) Speculating on currency futures
Answer: B
Which of the following is a benefit of global diversification?
A) Increased exposure to political risk
B) Reduced exposure to exchange rate fluctuations
C) Higher transaction costs
D) Limited access to emerging markets
Answer: B
The Sharpe ratio is a measure of:
A) Liquidity risk
B) Market risk
C) Risk-adjusted return
D) Credit risk
Answer: C
Which of the following is an example of temporal diversification?
A) Investing in stocks of different sectors
B) Investing in different asset classes
C) Investing at different times
D) Investing in bonds only
Answer: C
True or False: Diversification ensures protection against inflation.
A) True
B) False
Answer: B
Risk parity strategy in portfolio management involves:
A) Allocating equal risk to each asset in the portfolio
B) Allocating equal capital to each asset in the portfolio
C) Avoiding diversification
D) Focusing only on high-risk assets
Answer: A
Which of the following is a drawback of sector-specific diversification?
A) Increased exposure to market risk
B) Reduced exposure to company-specific risk
C) Higher transaction costs
D) Easier portfolio management
Answer: A
Modern Portfolio Theory (MPT) suggests that investors can minimize risk by:
A) Concentrating investments in a single asset
B) Diversifying across assets with low correlations
C) Avoiding asset allocation
D) Ignoring risk factors
Answer: B
Which of the following statements about correlation is true?
A) Correlation measures the volatility of an asset
B) Negative correlation implies assets move in the same direction
C) High correlation reduces diversification benefits
D) Correlation is irrelevant in portfolio management
Answer: C
A correlation coefficient of -1 indicates that two assets are:
A) Perfectly positively correlated
B) Perfectly negatively correlated
C) Not correlated
D) Uncorrelated
Answer: B
The purpose of cross-asset diversification is to:
A) Increase exposure to market risk
B) Minimize exposure to company-specific risk
C) Concentrate investments in a single asset class
D) Reduce overall portfolio risk
Answer: D
Monte Carlo simulation in portfolio management is used for:
A) Analyzing past performance
B) Predicting future returns
C) Estimating risk and return outcomes
D) Eliminating systematic risk
Answer: C
Which of the following is a benefit of diversifying across investment styles?
A) Increased exposure to market risk
B) Reduced exposure to interest rate risk
C) Higher transaction costs
D) Limited access to growth opportunities
Answer: B
Strategic asset allocation involves:
A) Frequent trading to capture short-term gains
B) Long-term planning to achieve specific goals
C) Speculating on market trends
D) Ignoring portfolio rebalancing
Answer: B
Which of the following is a limitation of diversification?
A) Increased portfolio risk
B) Decreased liquidity
C) Difficulty in portfolio management
D) Over-reliance on individual assets
Answer: C
True or False: Diversification can guarantee protection against market downturns.
A) True
B) False
Answer: B
Which of the following strategies focuses on minimizing downside risk?
A) Diversification
B) Concentration
C) Leverage
D) Speculation
Answer: A
The term “beta” in portfolio management measures:
A) Market risk
B) Interest rate risk
C) Credit risk
D) Currency risk
Answer: A
Which of the following is a factor that should be considered when diversifying a portfolio?
A) Past performance of assets
B) Economic forecasts
C) Political stability
D) All of the above
Answer: D
Which of the following is an example of diversification within a single asset class?
A) Investing in bonds only
B) Investing in stocks from different sectors
C) Investing in different countries’ currencies
D) Investing in real estate only
Answer: B
Tactical asset allocation involves:
A) Long-term planning
B) Short-term adjustments based on market conditions
C) Ignoring market trends
D) Passive management of investments
Answer: B
True or False: Diversification ensures that all assets perform equally well in all market conditions.
A) True
B) False
Answer: B
Which of the following is a risk associated with over-diversification?
A) Increased exposure to market risk
B) Lower transaction costs
C) Reduced liquidity
D) Higher returns
Answer: C
The term “unsystematic risk” refers to:
A) Risks that affect the entire market
B) Risks that affect a specific company or industry
C) Risks that cannot be avoided through diversification
D) Risks that are always diversified
Answer: B
A diversified portfolio typically:
A) Has all assets with high correlations
B) Includes assets with low correlations
C) Focuses on a single industry
D) Avoids international investments
Answer: B
True or False: Diversification ensures protection against currency fluctuations.
A) True
B) False
Answer: B
An investor who diversifies across different sectors in the stock market is attempting to:
A) Increase exposure to market risk
B) Reduce exposure to company-specific risk
C) Ignore market trends
D) Concentrate investments in a single asset
Answer: B
Which of the following is a limitation of strategic asset allocation?
A) High transaction costs
B) Difficulty in monitoring investments
C) Over-reliance on short-term market trends
D) Inflexibility in adjusting to market changes
Answer: D
Which of the following is a benefit of cross-border diversification?
A) Increased exposure to exchange rate risk
B) Reduced exposure to political risk
C) Higher transaction costs
D) Limited access to global markets
Answer: B
The term “portfolio rebalancing” refers to:
A) Changing the asset allocation based on market conditions
B) Concentrating investments in a single asset class
C) Ignoring changes in asset values
D) Speculating on market trends
Answer: A
True or False: Diversification ensures higher returns compared to concentrated investments.
A) True
B) False
Answer: B
Which of the following is a measure of diversification in a portfolio?
A) Standard deviation
B) Liquidity ratio
C) Inventory turnover
D) Profit margin
Answer: A
Which of the following statements about risk management through diversification is true?
A) Diversification eliminates all types of risk
B) Diversification increases the risk of total loss
C) Diversification spreads risk across multiple assets
D) Diversification guarantees high returns
Answer: C
The term “concentration risk” refers to:
A) Risks associated with over-diversification
B) Risks associated with focusing on a single asset
C) Risks associated with short-term investments
D) Risks associated with currency fluctuations
Answer: B
True or False: Diversification is a one-time strategy and does not require regular review.
A) True
B) False
Answer: B
Which of the following is a benefit of diversifying across different investment styles?
A) Increased exposure to company-specific risk
B) Reduced exposure to market risk
C) Higher transaction costs
D) Lower portfolio volatility
Answer: B