Which one of the following statements about diversification in portfolio management is FALSE?

A diversified portfolio aims to mitigate risk by spreading investments across various asset classes, sectors, or geographic regions. This reduces the impact of poor performance from any single investment on the overall portfolio. However, it is crucial to understand that while diversification can significantly lower the overall risk, it cannot completely eliminate the risk associated with investing in stocks or other securities. Market risk, or systematic risk, affects all investments and cannot be diversified away.

This understanding highlights why the statement asserting that diversification can completely eliminate the risk of investing in stocks is incorrect. In reality, investors will always face some level of risk, whether that comes from market movements or economic factors that impact the entire investment environment. Therefore, while diversification is a powerful tool for risk management, it falls short of offering complete risk elimination, making the assertion false.