Which statement about diversification in portfolio management is FALSE?

Diversification is a fundamental concept in portfolio management that involves spreading investments across various assets to reduce risk. The statement that says diversification can completely eliminate the risk of investing in stocks is misleading. While diversification is an effective strategy for managing and mitigating certain risks, such as company-specific or sector-specific risks, it does not eliminate all types of risk—particularly systemic risk, which affects the entire market.

Investing in stocks inherently involves some level of risk due to market fluctuations, economic changes, and other external factors. Diversification can help minimize the impact of any one investment's poor performance on the overall portfolio but cannot guarantee complete risk elimination. Therefore, the assertion that it can completely eliminate stock investment risk is incorrect.

In contrast, diversification helps manage risk effectively, benefits all investments to some degree, and is crucial in reducing overall portfolio volatility by smoothing out returns across different asset classes. Understanding these principles is essential for building a resilient investment portfolio.