Final answer:
The statement is True; diversification helps to reduce the impact of adverse events on any individual stock by spreading investments across various financial instruments, thereby smoothing out the overall investment volatility.
Step-by-step explanation:
The statement that the main benefit of diversification is that it reduces the exposure of your investments to the adverse effects of any individual stock is True. Diversification is the strategy of spreading investments across a variety of financial instruments, sectors, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.
Investing in a single company's stocks or bonds can be risky due to various factors that could impact the company's performance. Following the concept of not putting all your eggs in one basket, financial investors often recommend diversification. By diversifying, an investor can iron out the ups and downs of investing, as gains in one area can help offset losses in another.
An example of diversification in practice is investing in mutual funds, which pool money from many investors to purchase a broad portfolio of stocks or bonds. This inherently spreads out the risk as the fund is not reliant on the performance of a single investment.