Final answer:
The correct answer is option A. Diversification is a key investment strategy for reducing risk by spreading investments across various companies and sectors. It can reduce the volatility of a portfolio, even when investments are positively correlated. The correct statement regarding reducing risk is that diversification can reduce risk even with positively correlated returns.
Step-by-step explanation:
When it comes to reducing risks in investment, diversification is a strategy commonly recommended by financial advisors. The underlying idea is simple: rather than concentrating your investment in a single stock or bond, you spread your money across a wide array of companies from different sectors. This concept is closely associated with the adage 'Don't put all your eggs in one basket'. By diversifying, an investor mitigates the impact of any single company's performance on their overall portfolio.
One of the statements provided for evaluation is that 'diversifying investments can reduce risk even if the returns on those investments are positively correlated'. This statement is correct. Even if the assets in a diversified portfolio tend to move in the same direction, diversification can still help in smoothing the volatility because not all assets will move to the same degree or at the same time. Therefore, the fluctuations in value tend to be more moderate compared to a non-diversified portfolio.
The statement that buying stocks or bonds from a broad range of companies can help offset the risks of the ups and downs in the market is also accurate. This is evidenced by historical market data, like in 2008 when the stock market dropped significantly; diversified portfolios could mitigate this downturn to some extent compared to portfolios heavily concentrated in a particular stock or sector.
In summary, the correct option regarding the statements about reducing risk is A. Diversifying investments can reduce risk even if the returns on those investments are positively correlated.