Question

What does it mean to “diversify” your portfolio?

A. Pooling your money into one fund so that you can more easily manage your investments.
B. Investing all of your money into 1-2 funds so that you can focus on making money through compound interest.
C. Spreading risk by investing your money in a variety of funds and investment options.
D. Putting your money in funds that come with high fees since they are guaranteed to perform better.

Answer 1

C. Spreading risk by investing your money in a variety of funds and investment options.

Step-by-step explanation:

To “diversify” a portfolio is to invest in a variety of assets as opposed to focusing on one type of asset. To diversify is to invest in different classes of assets to minimize the risks associated with investing.

Diversification minimizes risk by spreading it in the different classes of assets. Should returns from one class of assets be unfavorable, the losses incurred will be neutralized by positive returns from the other assets.