Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which of the following best explains how diversification works in investment portfolios?

By spreading investments across different assets, diversification reduces the overall risk of the portfolio.

Diversification increases the potential for loss by concentrating investments in a single security.

Diversification guarantees higher returns regardless of market conditions.

Diversification eliminates all types of investment risk.

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Verified step by step guidance

Understand the concept of diversification: Diversification is a risk management strategy that involves spreading investments across various financial assets, industries, or other categories to reduce exposure to any single asset or risk.

Analyze the first option: 'By spreading investments across different assets, diversification reduces the overall risk of the portfolio.' This aligns with the definition of diversification, as it reduces the impact of poor performance in one asset by balancing it with others.

Evaluate the second option: 'Diversification increases the potential for loss by concentrating investments in a single security.' This contradicts the principle of diversification, as concentrating investments in a single security increases risk rather than reducing it.

Assess the third option: 'Diversification guarantees higher returns regardless of market conditions.' Diversification does not guarantee higher returns; it aims to reduce risk. Returns depend on market performance and other factors.

Review the fourth option: 'Diversification eliminates all types of investment risk.' Diversification reduces risk but does not eliminate it entirely. Systematic risk, such as market-wide risks, cannot be eliminated through diversification.