What is the primary purpose of diversification in investing?

• A. To spread investments across asset classes and sectors to reduce risk.
• B. To maximize fees paid to brokers.
• C. To guarantee higher returns.
• D. To focus on a single asset to simplify management.

Answer: (A)

Diversification spreads investments across different asset classes and sectors to reduce risk. Different parts of the market don’t move in lockstep, so when one area drops, others may hold steady or rise. This helps smooth out the portfolio’s overall performance and lowers unsystematic risk—the kind of risk tied to specific investments. It doesn’t promise higher returns, and it isn’t about paying higher fees or concentrating on one asset to keep things simple. Instead, the goal is a more balanced, resilient approach to investing over time.