Someone who diversifies investments is more likely to:

• A. guarantee higher returns than the market average
• B. avoid paying any taxes on investment gains
• C. reduce overall risk in their portfolio
• D. increase the chance of losing all their money

Answer: (C)

Verified step by step guidance

1. Understand the concept of diversification: Diversification means spreading investments across different assets to reduce exposure to any single asset's risk.
2. Recall the relationship between risk and return: While diversification can reduce the overall risk of a portfolio, it does not guarantee higher returns than the market average.
3. Consider tax implications: Diversification itself does not affect whether you pay taxes on investment gains; taxes depend on tax laws and the nature of the investments.
4. Analyze the risk of losing all money: Diversification reduces the chance of losing all money because losses in some investments can be offset by gains in others.
5. Conclude that diversification primarily serves to reduce overall portfolio risk, rather than guaranteeing returns or affecting taxes.