Chartered Investment Manager (CIM) Practice Exam · Question
What is the primary role of diversification in portfolio construction?
Diversification is a strategy designed to reduce idiosyncratic or unsystematic risk by investing in a variety of assets. While it cannot eliminate systemic risk
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Question: What is the primary role of diversification in portfolio construction?
Answer options:
- To guarantee positive returns in all market conditions.
- To eliminate all systemic risk from the portfolio. ✅ To reduce unsystematic (specific) risk by combining different assets.
- To maximize the portfolio's exposure to high-growth sectors.
Correct answer: To reduce unsystematic (specific) risk by combining different assets.
Explanation: Diversification is a strategy designed to reduce idiosyncratic or unsystematic risk by investing in a variety of assets. While it cannot eliminate systemic risk (market risk), it can smooth out portfolio returns and reduce overall risk for a given level of expected return.
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