Final answer:
The Vanguard 500 Index Fund tracks the performance of the S&P 500 by buying shares in each S&P 500 company. This is achieved through diversification, which reduces risk by investing in a range of companies. The fund is classified as an index fund, as it seeks to imitate the overall behavior of the stock market.
Step-by-step explanation:
The Vanguard 500 Index Fund tracks the performance of the S&P 500 by buying shares in each S&P 500 company.
An index fund is a type of mutual fund that seeks to imitate the overall behavior of the stock market. By purchasing shares in each company in the S&P 500, the Vanguard 500 Index Fund provides investors with exposure to the performance of the entire index.
This practice of investing in a range of companies is called diversification and helps mitigate the risk associated with investing in any individual firm.