Which of the following is a dimension of risk management in modern portfolio theory?

• A. Diversification of correlated securities
• B. Limiting risk to enhance reward
• C. Investing in high-risk assets
• D. Maximizing returns without regard to risk

Answer: (B)

In modern portfolio theory, limiting risk to enhance reward is a fundamental principle that emphasizes the trade-off between risk and return. This concept asserts that investors should seek to optimize their portfolios by balancing the pursuit of higher returns with a careful consideration of the risks associated with different investment choices.

By focusing on limiting risk, investors can structure their portfolios in a way that they are not overly exposed to any single investment's volatility. This approach helps to stabilize returns over time and can prevent significant losses, thereby enhancing the likelihood of achieving a favorable risk-return profile. In essence, it illustrates the core idea of risk-adjusted returns, where the goal is to increase expected returns while mitigating potential downsides.

The other options do not align with the principles of risk management as robustly. For example, diversification of correlated securities does involve risk management but is primarily about spreading risk rather than limiting it. Investing in high-risk assets and maximizing returns without regard to risk goes against the essence of modern portfolio theory, which advocates for a careful assessment and management of risk as essential to achieving better financial outcomes.