What is diversification in investing?

• A. Spreading investments across asset classes and securities to reduce risk.
• B. Concentrating investments in a single stock.
• C. Timing the market to buy and sell frequently.
• D. Avoiding diversification to simplify portfolios.

Answer: (B)

Diversification means spreading investments across different asset classes and securities to reduce risk. By combining assets that don’t move in perfect unison, the portfolio’s overall ups and downs become smoother, since gains in some areas can help offset losses in others. Think of including a mix like stocks, bonds, cash, and perhaps real estate or commodities; each behaves differently under various market conditions, so a drop in one area doesn’t wreck the whole portfolio. This approach mainly reduces unsystematic risk—the risk tied to individual companies or sectors—while still aiming for a reasonable return over time. The idea isn’t to chase every upside, but to protect against big losses and create more stable long-term growth. Concentrating in a single stock, attempting to time the market, or avoiding diversification all run counter to this goal because they expose you to higher volatility and risk.