MPT and diversification in ERISA emphasize what aspect?

MPT and diversification in ERISA emphasize what aspect?

• A. It is a bedrock tenet of ERISA; diversification reduces risk of large losses
• B. Diversification is optional under ERISA
• C. Diversification increases risk
• D. It has nothing to do with ERISA

Answer: (A)

Diversification reduces risk by spreading investments across assets that don’t move in lockstep, so a portfolio isn’t knocked down dramatically by the poor performance of a single investment. Modern portfolio theory shows that combining such assets can lower overall volatility without sacrificing expected return, creating a smoother path for long-term outcomes. In ERISA, fiduciaries are required to diversify the plan’s investments to minimize the risk of large losses, unless there’s a prudent reason not to diversify given the plan’s objectives and constraints. This makes diversification a foundational duty in ERISA, rather than an optional choice, and it specifically targets reducing unsystematic risk—those risks unique to individual assets—while not eliminating systematic market risk.

Diversification reduces risk by spreading investments across assets that don’t move in lockstep, so a portfolio isn’t knocked down dramatically by the poor performance of a single investment. Modern portfolio theory shows that combining such assets can lower overall volatility without sacrificing expected return, creating a smoother path for long-term outcomes. In ERISA, fiduciaries are required to diversify the plan’s investments to minimize the risk of large losses, unless there’s a prudent reason not to diversify given the plan’s objectives and constraints. This makes diversification a foundational duty in ERISA, rather than an optional choice, and it specifically targets reducing unsystematic risk—those risks unique to individual assets—while not eliminating systematic market risk.