Diversification is an investing technique characterized by buying a variety of different investments to spread market risk. Which statement best defines diversification?

Diversification is an investing technique characterized by buying a variety of different investments to spread market risk. Which statement best defines diversification?

• A. An investing technique characterized by buying a variety of different investments so that the market risk is spread out and reduced
• B. A plan to invest in a single sector to maximize returns
• C. A strategy to minimize tax liabilities
• D. A method that guarantees a minimum return

Answer: (A)

Diversification means spreading investments across a variety of different assets so that the impact of any single investment’s poor performance is reduced. By not putting all your money in one thing, you gain the chance that other investments may perform well at the same time, which smooths overall portfolio volatility. This approach helps cut risk that comes from a specific company or sector, without promising any minimum return. It’s not about focusing on one sector, nor about tax savings, and it doesn’t guarantee results. So the statement describing buying a mix of different investments to spread risk is the best definition.

Diversification means spreading investments across a variety of different assets so that the impact of any single investment’s poor performance is reduced. By not putting all your money in one thing, you gain the chance that other investments may perform well at the same time, which smooths overall portfolio volatility. This approach helps cut risk that comes from a specific company or sector, without promising any minimum return. It’s not about focusing on one sector, nor about tax savings, and it doesn’t guarantee results. So the statement describing buying a mix of different investments to spread risk is the best definition.