Which of the following is a way by which risk can be diversified?

• A. Ignoring market trends and analysis
• B. Concentrating all investments in a single industry
• C. Relying solely on insider information
• D. Investing in a variety of unrelated assets

Answer: (D)

Verified step by step guidance

1. Understand the concept of diversification: Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, or other categories to reduce exposure to any single asset or risk.
2. Analyze the options provided: Evaluate each option to determine whether it aligns with the principle of diversification. For example, ignoring market trends, concentrating investments in one industry, or relying solely on insider information do not reduce risk effectively.
3. Focus on the correct answer: Investing in a variety of unrelated assets is the key to diversification because it minimizes the impact of poor performance in one asset or industry on the overall portfolio.
4. Explain why diversification works: Diversification reduces unsystematic risk (specific to individual assets or industries) by ensuring that losses in one area can be offset by gains in another.
5. Conclude with practical advice: Encourage the practice of building a diversified portfolio by including assets from different industries, geographic regions, and asset classes (e.g., stocks, bonds, real estate) to achieve balanced risk management.