Part 1Which of the following is a benefit to an individual purchasing a mutual fund? Part 2
A. An opportunity to free ride B. Diversification C. Increased risk D. Higher transaction costs

Question

Part 1Which of the following is a benefit to an individual purchasing a mutual​ fund? Part 2
A. An opportunity to free ride B. Diversification C. Increased risk D. Higher transaction costs

BlackTom AI · Accepted Answer

Question restatement: Which of the following is a benefit to an individual purchasing a mutual fund? Options: A) An opportunity to free ride, B) Diversification, C) Increased risk, D) Higher transaction costs.
Option A: 'An opportunity to free ride' is incorrect because mutual funds are not designed to enable free riding; investors still bear the fund’s fees and share in the fund’s performance. The idea of free riding ignores the costs and governance involved in pooled investments and is not considered a regulatory or practical benefit.
Option B: 'Diversification' is the core benefit of mutual funds. By pooling money and investing in a broad basket of assets, a mutual fund spreads risk across many securities, reducing the impact of any single investment's poor performance on the overall portfolio. This aligns with the principle of diversification reducing unsystematic risk.
Option C: 'Increased risk' is not a benefit. While some funds may carry higher volatility depending on their strategy or asset class, the goal of diversification and professional management is typically to manage or reduce risk, not to increase it. Therefore this option describes a potential risk, not a benefit.
Option D: 'Higher transaction costs' is not a benefit. Mutual funds are often praised for cost efficiency through economies of scale, which can keep per-investor costs lower than if you bought many individual securities. While some funds may have loads or fees, the general stated benefit is cost efficiency, not higher costs. Thus this option does not describe a benefit.
In summary, the only option that truly represents a standard benefit of mutual funds—diversification across many assets to reduce risk—is option B.

Quiz:Quiz 2

Part 1Which of the following is a benefit to an individual purchasing a mutual fund? Part 2 A. An opportunity to free ride B. Diversification C. Increased risk D. Higher transaction costs

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