Which investment would have the greatest diversification? (2024)

Which investment would have the greatest diversification?

Expert-Verified Answer

The highest level of diversification can be achieved by investing in different asset classes. Bonds are far less volatile than stocks, and government bonds often go up in price when stocks go down. Commodities are another significant asset class with a different pattern of returns.

Exchange-traded funds, index funds, mutual funds and robo-advisors offer ways to quickly diversify your portfolio without having to research individual stocks or bonds.

Diversification is an investment strategy that mixes a wide variety of investments from different categories within a portfolio.

However, maximum diversification is achieved with around 30 stocks in a portfolio. After that point, including more assets adds a negligible amount of diversification. Diversification is useful for reducing unsystematic risk. Unsystematic risk is the risk associated with a certain stock or sector.

Diversification reduces risk by investing in vehicles that span different financial instruments, industries, and other categories. Unsystematic risk can be mitigated through diversification, while systematic or market risk is generally unavoidable.

In other words, investors use diversification to avoid the huge losses that can happen by putting all of their eggs in one basket. For example, when you diversify, you allocate a portion of your investments to riskier stock market trading, which you spread out across different types of stocks and companies.

Diversification is the spreading of your investments both among and within different asset classes. And rebalancing means making regular adjustments to ensure you're still hitting your target allocation over time.

What is the best example of diversification?

Examples of Diversification: Apple

One of the most famous companies in the world, Apple Inc. is one of the greatest examples of a “related diversification” model. Related diversification means there are commonalities between existing products/services and new ones in development.

Diversification is the practice of spreading your investments around so that your exposure to any one type of asset is limited. This practice is designed to help reduce the volatility of your portfolio over time.

The best example of financial diversification is owning a variety of asset types, such as having 20% of assets in cash, 40% in government securities, and 40% in stocks.

Property 3: The most diversified portfolio is the portfolio, among all long-short portfolios, that maximizes its minimal correlation with all the assets, with all the long-only portfolios and with all the long-only factors ¹⁰.

A diversified portfolio should have a broad mix of investments. For years, many financial advisors recommended building a 60/40 portfolio, allocating 60% of capital to stocks and 40% to fixed-income investments such as bonds. Meanwhile, others have argued for more stock exposure, especially for younger investors.

However, diversifying products is usually risky and requires extensive market research and analysis. There are three main types of product diversification – concentric, horizontal, and conglomerate, based on the scope and approach undertaken.

1) Which of the following is an example of diversification : The correct answer is e) Market expansion. To diversify, a company will expand to a new market. 2) A restaurant that specializes in using organic produce decides to buy a farm that practices organic farming.

With diversification, a business can successfully cross-sell their products. For example, an automobile company famous for its car deals can also introduce engine oil or other car parts to an old market or cross-sell new products.

What are the three 3 factors to consider in diversification?

Exposure to different opportunities: Diversification allows you to take advantage of different trends and opportunities across asset classes, geographic regions and individual investments. Smoother returns: By decreasing the volatility of your portfolio, returns can be smoother and more predictable.

Diversifying your business can also bring about some challenges, such as higher costs for research and development, marketing, production, distribution, and management. Additionally, you may lose focus on your core business and customers, or face conflicts between different businesses or segments.

Diversification is not without challenges and drawbacks, however. It can also expose you to several risks, such as losing focus, diluting your brand identity, increasing your costs and complexity, facing more competition, and failing to meet customer expectations.

Disadvantages of Diversification

Managing portfolios can get difficult: Each asset class has different rules and works differently. With so many investments in a portfolio, managing them can get difficult. Tax implications: Different securities have different tax implications.