Which statement about diversification is true?

Which statement about diversification is true?

• A. It involves holding only one type of asset
• B. It is meant to minimize risk by spreading investments
• C. It guarantees maximum returns
• D. It creates more volatile investment sources

Answer: (B)

Diversification is a strategy used in investment to manage risk by spreading investments across various asset classes, sectors, or geographic regions. This approach reduces exposure to any single investment or risk, as the performance of one asset may offset the performance of another. For example, if one investment performs poorly, others may perform well, thereby stabilizing the overall portfolio's return. The essence of diversification lies in its ability to lower the overall risk of an investment portfolio without necessarily sacrificing potential returns. By investing in a mix of different assets, an investor can protect themselves against the volatility and unpredictability of individual investments. Contrarily, holding only one type of asset would not achieve the benefits of diversification, as it would leave the investor vulnerable to that asset's performance alone. Likewise, diversification does not guarantee maximum returns, as its primary aim is to manage risk rather than solely to maximize profits. Lastly, while diversification can lead to a more stable portfolio, it does not create more volatility; instead, it tends to smooth out the impacts of market fluctuations.

Diversification is a strategy used in investment to manage risk by spreading investments across various asset classes, sectors, or geographic regions. This approach reduces exposure to any single investment or risk, as the performance of one asset may offset the performance of another. For example, if one investment performs poorly, others may perform well, thereby stabilizing the overall portfolio's return.

The essence of diversification lies in its ability to lower the overall risk of an investment portfolio without necessarily sacrificing potential returns. By investing in a mix of different assets, an investor can protect themselves against the volatility and unpredictability of individual investments.

Contrarily, holding only one type of asset would not achieve the benefits of diversification, as it would leave the investor vulnerable to that asset's performance alone. Likewise, diversification does not guarantee maximum returns, as its primary aim is to manage risk rather than solely to maximize profits. Lastly, while diversification can lead to a more stable portfolio, it does not create more volatility; instead, it tends to smooth out the impacts of market fluctuations.