Final answer:
A portfolio is not necessarily less risky when its investments move in perfect tandem; in fact, this might increase risk. Diversification is key to reducing portfolio risk by spreading investments across various assets. An example of high risk being detrimental is the 2008 financial crisis, where many investors faced severe losses.
Step-by-step explanation:
The statement that a portfolio can be less risky when its investments move in perfect tandem is false. In the context of investment portfolios, the concept of diversification is recommended as a way to reduce risk. Diversification means investing in a wide range of assets so that the performance of any single investment has less impact on the overall portfolio. The reason diversification works is because it spreads risk across different types of investments, sectors, and geographic locations. If the investments move in perfect tandem, then they are likely to experience the same ups and downs simultaneously, which could actually increase risk instead of mitigating it.
Throughout history, when has a high risk level proven to be detrimental to an investment portfolio? One example is the 2008 financial crisis, where average U.S. stock funds declined by 38%, having a profound impact on individuals and households, especially those close to retirement.
Therefore, while diversification may not ensure economic success, it is a standard strategy used to counteract the risk of significant losses by cancelling out extreme fluctuations in the value of a portfolio's assets.