Final answer:
Diversification is the strategy investors use to choose securities in a way that a loss in one investment would not have a large impact on their portfolio. It involves spreading investments across different assets or companies to reduce risk.
Step-by-step explanation:
Diversification is the strategy investors use to choose securities in a way that a loss in one investment would not have a large impact on their portfolio. It involves spreading investments across different assets or companies, which helps to reduce risk. By diversifying their portfolio, investors protect themselves from the potential negative impact of individual investment losses.
For example, if an investor only invests in the stock of one company and that company performs poorly, the investor could suffer significant losses. However, if the investor diversifies their holdings by investing in multiple companies or different types of assets, the negative impact of one underperforming investment can be mitigated by the positive performance of others.