Final Answer:
As you allocate more of your investment portfolio to bonds, you reduce your exposure to market risk, but increase your exposure to interest rate risk.
The correct option is C) "market; interest rate risk."
Step-by-step explanation:
Market Risk vs. Interest Rate Risk:
The correct option is C) "market; interest rate risk."
Market risk refers to the risk of overall market fluctuations affecting the value of investments. Allocating to bonds, which are generally considered safer, reduces exposure to market risk.
On the other hand, interest rate risk is the risk that changes in interest rates will impact the value of bonds. When interest rates rise, bond prices tend to fall, and vice versa. Therefore, increasing bond allocation increases exposure to interest rate risk.
Explanation for Option C:
Allocating more to bonds reduces exposure to market risk because bonds are often less volatile than stocks.
However, as bonds are sensitive to interest rate changes, increasing bond exposure raises the risk of losses due to fluctuations in interest rates.
The statement accurately reflects the trade-off involved in adjusting the allocation of a portfolio between bonds and other assets, highlighting the dynamic nature of risk exposure in investment decisions.
In summary, the correct option is C, as explained by the reduction in market risk and the increase in interest rate risk associated with allocating more to bonds.