Question

Diversification is important in investing because…A. It helps you to balance your risk across different types of investments.B. It increases your overall risk, which guarantees that you will make more money.C. It ensures that you only make low-risk investments.D. It helps you gain the highest rate of return despite any risks.

Answer 1

A. It helps you to balance your risk across different types of investments

Answer 2

Option A is correct.

Diversification is important in investing because it helps you to balance your risk across different types of investments.

Further Explanation:

Diversification: It is a strategy of risk management that involves investing in a variety of investments like bond, stocks, exchange-traded funds, and treasury bills within a portfolio. It helps in the reduction of the unsystematic risk.  

Justification for the correct and incorrect answer:

A.

It helps you to balance your risk across different types of investments: This option is correct.

It helps to spread the risk across different types of investment by building a portfolio that consists of both risky securities like stock and risk-free securities like treasury bills.

B.

It increases your overall risk, which guarantees that you will make more money: This option is incorrect.  

It does not increase the risk because the portfolio includes both risky securities like stock and risk-free securities like treasury bills.

C.

It ensures that you only make low-risk investments: This option is incorrect.

It does not involve investing in only low–risk investments. It aims at building a portfolio that includes both risky securities like stock and risk-free securities like treasury bills and also ensures an individual level of risk is maintained.

D.

It helps you gain the highest rate of return despite any risks: This option is incorrect.

The diversification only spread the risk across different types of investment but does not makes it zero.

Learn more:

1. Legal liability of the business

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2. The percentage of sales method

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3. The sales budget

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Answer details:

Grade: High School

Subject: Business studies

Chapter: Market risk

 

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