Which term describes the practice of spreading investments across multiple assets to minimize risk?

Which term describes the practice of spreading investments across multiple assets to minimize risk?

• A. Diversification
• B. Asset Allocation
• C. Time Value of Money
• D. Interest

Answer: (A)

Spreading investments across multiple assets to minimize risk is diversification. This approach reduces unsystematic risk—the risk tied to a single investment or industry—by combining assets that don’t move in perfect lockstep. When some assets perform well while others don’t, their differing price movements smooth out the portfolio’s overall returns, lowering the chance of a large loss. Keep in mind that diversification doesn’t eliminate market-wide risk that affects almost all investments, but it does help manage the risk specific to individual holdings. You can diversify by mixing across asset classes (stocks, bonds, cash equivalents) and within classes (different sectors, regions, or styles). For example, instead of owning only one stock, a portfolio can include a variety of stocks plus bonds to reduce the impact if any single investment falters. Other options listed aren’t about this spreading of risk: asset allocation is about balancing overall categories to fit risk tolerance, while Time Value of Money and Interest pertain to the concepts of value over time and the cost or return of money, not the practice of diversifying holdings.

Spreading investments across multiple assets to minimize risk is diversification. This approach reduces unsystematic risk—the risk tied to a single investment or industry—by combining assets that don’t move in perfect lockstep. When some assets perform well while others don’t, their differing price movements smooth out the portfolio’s overall returns, lowering the chance of a large loss. Keep in mind that diversification doesn’t eliminate market-wide risk that affects almost all investments, but it does help manage the risk specific to individual holdings. You can diversify by mixing across asset classes (stocks, bonds, cash equivalents) and within classes (different sectors, regions, or styles). For example, instead of owning only one stock, a portfolio can include a variety of stocks plus bonds to reduce the impact if any single investment falters. Other options listed aren’t about this spreading of risk: asset allocation is about balancing overall categories to fit risk tolerance, while Time Value of Money and Interest pertain to the concepts of value over time and the cost or return of money, not the practice of diversifying holdings.