Final answer:
Diversification (a) refers to lending a variety of loans to a variety of customers. By lending to a diverse set of customers, banks can reduce the risk of loan defaults.
Step-by-step explanation:
Diversification (a) refers to lending a variety of loans, such as car loans, home loans, and business loans to a variety of customers. By lending to a diverse set of customers across different industries and geographic areas, banks can reduce the risk of an unexpectedly high rate of loan defaults. This is because if one category of borrowers defaults, it can be balanced out by other borrowers who have a lower number of defaults.