What does 'diversification' refer to in investment strategy?

What does 'diversification' refer to in investment strategy?

• A. The practice of concentrating investments in one area
• B. The practice of investing solely in stocks
• C. The practice of spreading investments across various assets
• D. The practice of investing in a single commodity

Answer: (C)

Diversification in investment strategy refers to the practice of spreading investments across various assets. This approach is designed to reduce risk by investing in a diverse array of securities, such as stocks, bonds, real estate, and other asset classes. The fundamental idea is that a well-diversified portfolio will yield higher returns with a lower risk compared to one that heavily concentrates investments in a single asset or type of asset. By holding a variety of investments, an investor can mitigate the adverse effects of poor performance from any single investment. For example, if one sector of the market experiences a downturn, other investments in the portfolio might perform well and help offset those losses. This balanced approach is a cornerstone of effective investment management, as it recognizes the unpredictability of markets and aims for a more stable overall performance.

Diversification in investment strategy refers to the practice of spreading investments across various assets. This approach is designed to reduce risk by investing in a diverse array of securities, such as stocks, bonds, real estate, and other asset classes. The fundamental idea is that a well-diversified portfolio will yield higher returns with a lower risk compared to one that heavily concentrates investments in a single asset or type of asset.

By holding a variety of investments, an investor can mitigate the adverse effects of poor performance from any single investment. For example, if one sector of the market experiences a downturn, other investments in the portfolio might perform well and help offset those losses. This balanced approach is a cornerstone of effective investment management, as it recognizes the unpredictability of markets and aims for a more stable overall performance.