Diversification is best described as which?

• A. Degree to which a portfolio will increase greater than the market.
• B. Relative sensitivity of a stock's return to the market's return.
• C. Estimate of range (plus or minus) around the expected rate of return which the actual rate of return will tend to fall.
• D. Measure of issue-specific risk related to the number of dissimilar issues held.

Answer: (D)

Diversification focuses on reducing risk that is specific to individual investments by spreading money across many different issues. The more dissimilar securities you hold, the less impact any one issuer’s problems have on the overall portfolio, which lowers unsystematic (issue-specific) risk. That’s why describing diversification as a measure of issue-specific risk tied to the number of different issues held best captures the concept. The other statements describe related ideas you often see in risk and return: one is about portfolio performance relative to the market, another about how a stock moves with the market (systematic risk or beta), and the last about the range of possible returns (total risk or volatility).