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What is diversification intended to achieve in a portfolio?

  1. A Guarantee a positive return
  2. B Reduce unsystematic risk without necessarily reducing expected return
  3. C Eliminate all risk
  4. D Maximise returns from a single sector
Answer

Reduce unsystematic risk without necessarily reducing expected return

Combining imperfectly correlated assets lowers portfolio volatility. It cannot remove market-wide systematic risk.

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