#### Solution By Steps***Step 1: Understand the Concept of Diversification***Diversification refers to the strategy of spreading investments across various financial instruments, industries, or other categories to reduce risk. It is based on the principle that a diversified portfolio will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.***Step 2: Analyze Each Option***- **A. focuses all investments on a single stock or company.** This is the opposite of diversification, which aims to spread risk across multiple investments.- **B. protects an investor in case one investment fails.** This aligns with the purpose of diversification, which is to mitigate the risk of loss from any single investment failing.- **C. guarantees that an investment will grow at a certain rate.** Diversification does not guarantee specific growth rates; it only aims to reduce risk.- **D. ensures that no capital can be lost in an investment.** No investment strategy can guarantee no loss of capital, as all investments carry some level of risk.***Step 3: Select the Correct Option***Based on the analysis, option B correctly describes the benefit of diversification.#### Final AnswerB. protects an investor in case one investment fails.This strategy is significant because it helps investors manage risk by not putting all their capital into a single investment, thereby reducing the potential impact of a single investment's poor performance on the overall portfolio.
FAQs
Diversification is a helpful investment? ›
Key takeaways. Diversification can help reduce the risk that you don't meet your future financial goals. Consider spreading your net worth across multiple asset classes that work in different directions. Don't get drawn into the “chasing returns” mentality.
Is diversification good for investing? ›Diversification is a common investing technique used to reduce your chances of experiencing large losses. By spreading your investments across different assets, you're less likely to have your portfolio wiped out due to one negative event impacting that single holding.
Is diversification a good strategy? ›By owning different types of investments that typically generate varied performance across different environments, you can position your portfolio to be more resilient during challenging market periods. Over your investment time horizon, diversification can help provide a degree of stability to your portfolio.
What is the power of diversification? ›Diversification involves spreading your investments across a wide range of assets to minimise the risk associated with concentrating too heavily on any single investment. A common strategy is to expand your stock portfolio beyond just a few stocks and includes bonds and other asset classes to diversify further.
What is the meaning of diversification? ›noun. 1. the act or process of diversifying; state of being diversified. 2. the act or practice of manufacturing a variety of products, investing in a variety of securities, selling a variety of merchandise, etc., so that a failure in or an economic slump affecting one of them will not be disastrous.
Is diversity good for investing? ›McKinsey & Company also found that higher overall business revenue correlates positively with increased diversity. More diverse companies — both from an ethnicity and gender perspective — were more likely to have financial performance above the national industry median.
Is diversification a helpful investment strategy? ›Diversifying a portfolio can potentially help you to improve your returns over time and smooth your path when navigating periods of increased volatility. Owning different investments with different risk profiles can make it easier to ride out changing market conditions, even if one part of your portfolio takes a hit.
What are 3 disadvantages of diversification? ›- Reduces Quality. There are only so many quality companies and even less that are priced at levels that provide a margin of safety. ...
- Too Complicated. ...
- Indexing. ...
- Market Risk. ...
- Below Average Returns. ...
- Bad Investment Vehicles. ...
- Lack of Focus or Attention to Your Portfolio.
Ramsey often recommends allocating investments into four types of mutual funds: growth, growth and income, aggressive growth, and international funds. This diversification strategy helps protect against market volatility and ensures a balanced approach to retirement savings.
What are the risks of diversification? ›It can help you increase your revenue, reduce your dependence on a single source of income, and create a competitive advantage. However, diversification also comes with some risks, such as higher costs, complexity, and uncertainty.
How does diversification build wealth? ›
A diversified portfolio, on the other hand, spreads your money across multiple investments. If one drops in value, the others can help offset the losses and stabilize your portfolio. Diversification is one of the most fundamental strategies for building an investment portfolio focused on long-term growth.
How much diversification is good? ›Most experts believe a portfolio diversification strategy having between 15 and 30 different assets is optimal to diversify away from the unsystematic risk. Proper diversification would require these assets to be spread among several different sectors and industries.
What is the primary benefit of diversification? ›The main benefit of diversification is that it reduces the exposure of your investments to the adverse effects of any individual stock.
What is the major benefit of diversification? ›Diversification means lowering your risk by spreading money across and within different asset classes, such as stocks, bonds and cash. It's one of the best ways to weather market ups and downs and maintain the potential for growth.
Why is diversification so important? ›Diversification can help reduce the risk that you don't meet your future financial goals. Consider spreading your net worth across multiple asset classes that work in different directions. Don't get drawn into the “chasing returns” mentality.
Why is it still a good idea to diversify your investments? ›Portfolio diversification involves investing in many different securities and types of assets so that your overall return doesn't depend too much on any single investment. Financial experts often recommend a diversified portfolio because it reduces risk without sacrificing much in the way of returns.
Is diversified a good investment? ›The benefits of diversification
Portfolio diversification reduces overall risk while increasing the potential for overall return. That's because some assets will perform well while others do poorly. But next year their positions could be reversed, with those that once lagged behind becoming the new winners.
Below Average Returns. Indexing and over diversification are disadvantages of diversification because quality suffers when you own inferior investments along with good investments. Below average returns result from transaction fees or high mutual fund fees.