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The principle of diversification tells us that:
A. concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk.
B. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk.
C. spreading an investment across five diverse companies will not lower the total risk.
D. spreading an investment across many diverse assets will eliminate all of the systematic risk.
E. spreading an investment across many diverse assets will eliminate some of the total risk

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Answer:

E. spreading an investment across many diverse assets will eliminate some of the total risk

Explanation:

Total risk is composed of systematic and unsystematic risk. Diversification eliminates nearly all unsystematic risk; which is also known as diversifiable risk or firm-specific risk. This is done by holding assets which are negatively correlated; like from uncorrelated industries. Systematic risk on the other hand affects the entire securities market and investors are compensated for it through a risk premium.

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