Diversification as an investment strategy means:

Question

Accepted Answer

Spreading investments across different asset classes to reduce risk. Diversification is an investment strategy that involves spreading investments across different asset classes, industries, geographic regions, or securities to reduce risk. The principle behind diversification is that a portfolio of varied investments will, on average, yield higher returns and pose lower risk than any individual investment within the portfolio, because different investments respond differently to the same economic events.

Investing all funds in a single stock describes concentration risk, which is the opposite of diversification and exposes the investor to maximum company-specific risk. Market timing involves attempting to predict market movements to buy low and sell high, which is a different strategy that does not necessarily involve diversification. Investing only in government bonds provides safety but lacks diversification across asset classes, missing potential returns from stocks and other investments.

Diversification is a fundamental investment concept on the DSST Introduction to Business exam. Students should understand how diversification reduces unsystematic (company-specific) risk, the concept that it cannot eliminate systematic (market-wide) risk, and how mutual funds and ETFs provide easy access to diversified portfolios for individual investors.

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