Diversification is best described as which of the following?

Diversification is best described as which of the following?

• A. Spreading investments across a wide variety of assets to reduce risk and potentially improve returns.
• B. Concentrating all funds in a single high-risk stock to maximize gains.
• C. Investing only in cash to avoid risk entirely.
• D. Timing the market to buy and sell frequently.

Answer: (A)

Diversification involves spreading investments across a wide mix of assets so the portfolio isn’t dependent on the performance of any single one. By owning different asset types and sectors, you reduce unsystematic risk—the risk tied to a specific company or industry—and can smooth volatility while still aiming for growth. This idea is captured by spreading money across various assets to lower risk while potentially boosting long-term returns. The other options describe strategies that don’t achieve diversification: concentrating in one high-risk stock increases exposure to that company’s fate, keeping everything in cash avoids risk but also growth, and trying to time the market centers on price predictions rather than building a balanced, diversified mix.

Diversification involves spreading investments across a wide mix of assets so the portfolio isn’t dependent on the performance of any single one. By owning different asset types and sectors, you reduce unsystematic risk—the risk tied to a specific company or industry—and can smooth volatility while still aiming for growth. This idea is captured by spreading money across various assets to lower risk while potentially boosting long-term returns. The other options describe strategies that don’t achieve diversification: concentrating in one high-risk stock increases exposure to that company’s fate, keeping everything in cash avoids risk but also growth, and trying to time the market centers on price predictions rather than building a balanced, diversified mix.