The practice of spreading money among different investments to reduce risk is known as _______.
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A. B. C. D.A
The correct answer is A. Diversification.
Diversification is the practice of spreading an investment portfolio across different types of assets, such as stocks, bonds, real estate, commodities, and so on. The idea behind diversification is to reduce the risk of losing money by not putting all your eggs in one basket. By diversifying your investments, you can potentially lower your overall risk while still achieving a reasonable rate of return.
The rationale for diversification is based on the fact that different types of assets often have different levels of risk and return. For example, stocks tend to be more volatile than bonds, but they also offer the potential for higher returns over the long term. By investing in a mix of assets, you can potentially benefit from the higher returns of stocks while also reducing your overall risk through exposure to more stable assets like bonds.
Diversification can be achieved in several ways. One way is to invest in a diversified mutual fund or exchange-traded fund (ETF) that holds a mix of different types of assets. Another way is to invest in a mix of individual stocks, bonds, and other assets. Additionally, diversification can be achieved by investing in different geographic regions or industries.
In summary, diversification is a risk management strategy that involves spreading investments across different types of assets to reduce overall risk while still achieving reasonable returns. It is an important concept for investors to understand and practice in order to build a well-diversified portfolio.