What is one key benefit of including alternative investments in a portfolio?

What is one key benefit of including alternative investments in a portfolio?

• A. Increased exposure to market volatility
• B. Reduction of potential tax liabilities
• C. Diversification of investment holdings
• D. Accessibility for all types of investors

Answer: (C)

Including alternative investments in a portfolio primarily offers the benefit of diversification of investment holdings. By integrating alternative assets—such as hedge funds, private equity, real estate, or commodities—investors can gain exposure to different risk-return profiles that are not typically correlated with traditional stock and bond markets. This lack of correlation helps to reduce overall portfolio risk, as different asset classes might respond differently to economic events. As a result, when traditional markets face downturns, alternative investments may perform independently, contributing to smoother portfolio returns over time. This diversification helps investors achieve a more balanced portfolio, improving potential risk-adjusted returns while mitigating volatility. Such strategic asset allocation can enhance the likelihood of meeting investment objectives over the long term.

Including alternative investments in a portfolio primarily offers the benefit of diversification of investment holdings. By integrating alternative assets—such as hedge funds, private equity, real estate, or commodities—investors can gain exposure to different risk-return profiles that are not typically correlated with traditional stock and bond markets. This lack of correlation helps to reduce overall portfolio risk, as different asset classes might respond differently to economic events. As a result, when traditional markets face downturns, alternative investments may perform independently, contributing to smoother portfolio returns over time.

This diversification helps investors achieve a more balanced portfolio, improving potential risk-adjusted returns while mitigating volatility. Such strategic asset allocation can enhance the likelihood of meeting investment objectives over the long term.