Which statement about diversification in portfolio management is incorrect?

The statement about diversification in portfolio management that is considered incorrect is that diversification can completely eliminate risk in stocks. This assertion fails to recognize the fundamental principles of investing. While diversification is a crucial strategy aimed at spreading risk across a variety of investments—such as different stocks, bonds, and even international assets—it does not eradicate risk entirely.

Even in a well-diversified portfolio, certain risks remain inherent, such as market risk, which is the risk of losses due to factors that affect the overall market rather than any specific stock or industry. Therefore, while diversification can significantly reduce unsystematic risk—the type of risk unique to a particular company or industry—it cannot eliminate systematic risk, which is the risk that affects all stocks across the market.

The other statements are true and highlight the value and practical benefits of diversification. A diversified portfolio indeed tends to offer greater security by mitigating specific risks and also allows for participation in various asset types, making it a valuable strategy for investors aiming for long-term growth while managing risk effectively.