Define diversification. What are the benefits to diversification? Will

Define diversification. What are the benefits to diversification? Will diversification always lead to greater expected portfolio returns?

What will be an ideal response?

ANSWER

Answer: Diversification is the practice of spreading your investment among different assets in an attempt to reduce the variability or uncertainty of returns. The benefit lies in the reduction of risk, not in the increase of expected returns. In fact, the expected return of a diversified portfolio consisting of assets with different expected rates of return will always have an expected return that is lower than the asset with the greatest expected return. So, no, diversification will NOT always lead to greater expected portfolio returns.