Benefit of Diversification in Modern Portfolio Theory

Very Easy Portfolio Risk And Return Modern Portfolio Theory

Modern Portfolio Theory (MPT) is a framework for constructing a portfolio of assets to maximize expected return for a given level of risk. One of the key components of MPT is the concept of diversification, which helps in managing risk.

Which of the following statements best describes the benefit of diversification in the context of Modern Portfolio Theory?

Diversification eliminates all risks associated with investing.

Diversification reduces the overall portfolio risk by spreading investments across various assets.

Diversification ensures a higher return on individual investments.

Hint

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