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The Importance of Diversification in Trading

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Questions and Answers

What is the primary goal of diversification in trading and investing?

To minimize exposure to risk and achieve a balance that can protect against significant losses (correct)
To maximise exposure to a single asset and focus all investments on one option
To focus solely on high-risk, high-reward investments for potential large returns
To concentrate investments in one geographic region and avoid spreading them globally

How does diversification help in risk reduction?

By concentrating investments in a single sector
By ignoring market volatility
By lowering the overall risk of a portfolio (correct)
By avoiding investment in multiple asset classes

What is the benefit of having a diversified portfolio in terms of returns?

It tends to have more stable returns over time (correct)
It guarantees high returns every year
It always leads to lower returns
It eliminates the need for risk management

Which of the following strategies is an example of geographic diversification?

Investing in different geographic regions, including developed, emerging, and frontier markets (D) Signup and view all the answers

What is a common pitfall of over-diversification?

It can dilute potential returns and make the portfolio challenging to manage (C) Signup and view all the answers

Why is it important to understand the correlation between different assets in a diversified portfolio?

To understand that highly correlated assets move in tandem, reducing the effectiveness of diversification (C) Signup and view all the answers

What is the purpose of rebalancing a diversified portfolio?

To maintain the desired level of diversification and risk profile (B) Signup and view all the answers

How does sector diversification within an asset class help in risk management?

By including different sectors such as technology, healthcare and etc. (B) Signup and view all the answers

What is time diversification and how does it reduce risk?

By staggering investments over time, reducing the impact of market timing (A) Signup and view all the answers

What is a key benefit of incorporating different investment styles such as growth, value, and income investing?

Each style performs differently under various market conditions, adding another layer of diversification (D) Signup and view all the answers

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