By diversifying, the risk of holding stock

a. can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.

b. can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.

c. can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bond econ

Question

Business

Deja Reed

6 March, 21:11

By diversifying, the risk of holding stock

a. can be reduced but not eliminated. On average over the past two centuries stocks paid a lower average real return than bonds.

b. can be eliminated. On average over the past two centuries stocks paid a higher average real return than bonds.

c. can be reduced but not eliminated. On average over the past two centuries stocks paid a higher average real return than bond econ

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Brenden Strong · Answer 1

Answer: Option C

Explanation: In simple words, diversification refers to the process in which the holder of a portfolio purchases and includes different types of securities with no or negative correlation between them. By doing so, the risk of the portfolio can be reduced but cannot be eliminated as the systematic risk due to the market inefficiencies cannot be eliminated.

It is evident that over the past two years stocks paid higher returns than bond due to the fact that globalization has increased the market for the companies leading to hoover share which further results in higher return for stock holders in comparison to bond holders who have a fixed return.