What is a primary goal of diversification?

• A. Diversification reduces to zero risk.
• B. To manage risk by spreading investments across asset classes.
• C. To guarantee higher returns.
• D. To avoid bonds in the portfolio.

Answer: (B)

Diversification is about risk management by spreading investments across different asset classes. By mixing assets that don’t move in perfect sync—such as stocks, bonds, cash equivalents, real estate, and sometimes commodities or international holdings—you reduce the impact of any single investment’s poor performance on the whole portfolio. This lowers unsystematic risk (the risk tied to a specific company or sector) and tends to smooth returns over time. It does not eliminate all risk (market-wide risks still exist) and it doesn’t guarantee higher returns; it’s about making the portfolio more resilient and potentially less volatile by diversification across asset classes.