Description of image

Question 6

Diversification is often recommended to reduce risk, but what does it actually accomplish in practice? Spreading investments across different stocks, bonds, sectors, or geographies means a single company's poor performance has less effect on your overall portfolio. It helps smooth returns because different assets respond differently to the same economic events -- for example, bonds may hold up when stocks fall. Diversification won't guarantee positive returns, and it can't eliminate systematic (market) risk, but it does reduce the impact of idiosyncratic (single-asset) shocks. For beginners, a simple way to diversify is to hold broad-market ETFs that already contain hundreds or thousands of securities. This question checks the core purpose of diversification in plain terms.

Which statement best describes the purpose of diversification?

Did You Also Know...

By Wise Wallet

John D. Rockefeller is widely regarded as America’s first confirmed billionaire, reaching that status in the 1910s.