Which term denotes spreading investments across multiple assets to minimize risk?

• A. Diversification
• B. Asset Allocation
• C. Market Risk
• D. Money Market Mutual Fund

Answer: (A)

Diversification means spreading investments across multiple assets to reduce risk. By not putting all money into a single asset or tightly related assets, you smooth out performance when some holdings stumble and others hold up, cutting unsystematic (company- or industry-specific) risk. The benefit comes from assets that aren’t perfectly correlated, so their price movements don’t move in lockstep. Asset allocation, while related, is about dividing the portfolio across broad asset classes (like stocks, bonds, and cash) to fit risk tolerance, not about choosing many individual assets to spread risk. Market risk is the overall risk to the market that diversification can’t eliminate, and a money market mutual fund is a cash-like investment, not a diversification strategy.