What is the main advantage of having a diversified investment portfolio?

What is the main advantage of having a diversified investment portfolio?

• A. It guarantees higher returns
• B. It minimizes risk by spreading investments
• C. It focuses only on high-risk investments
• D. It simplifies tracking of investments

Answer: (B)

A diversified investment portfolio is primarily advantageous because it minimizes risk by spreading investments across various asset classes, sectors, and geographies. This strategy reduces the impact of poor performance in any single investment. When one asset class is underperforming, others may perform well, helping to balance the overall performance of the portfolio. This risk management approach aims to enhance stability and protect an investor's capital over the long term. Focusing only on high-risk investments often leads to greater volatility and potential losses, as all these investments may not perform well simultaneously. While simplifying tracking can be a benefit of certain investment strategies, it is not a fundamental advantage of diversification. Guarantees of higher returns are unrealistic in investing; higher returns often come with increased risk, which diversification works to mitigate. Therefore, the primary benefit lies in the reduced risk associated with a well-diversified portfolio.

A diversified investment portfolio is primarily advantageous because it minimizes risk by spreading investments across various asset classes, sectors, and geographies. This strategy reduces the impact of poor performance in any single investment. When one asset class is underperforming, others may perform well, helping to balance the overall performance of the portfolio. This risk management approach aims to enhance stability and protect an investor's capital over the long term.

Focusing only on high-risk investments often leads to greater volatility and potential losses, as all these investments may not perform well simultaneously. While simplifying tracking can be a benefit of certain investment strategies, it is not a fundamental advantage of diversification. Guarantees of higher returns are unrealistic in investing; higher returns often come with increased risk, which diversification works to mitigate. Therefore, the primary benefit lies in the reduced risk associated with a well-diversified portfolio.