A method of lowering risk by investing in a wide variety of financial assets.

• A. Allocation
• B. Speculation
• C. Insurance
• D. Diversification

Answer: (D)

Diversification spreads investments across a wide range of assets so the poor performance of any one can be offset by others. Because asset returns aren’t perfectly correlated, when some investments dip, others may hold steady or rise, smoothing overall portfolio volatility. This reduces unsystematic risk tied to individual securities, leaving only the broader market risk. Allocation focuses on how much to invest in different asset classes, not necessarily a broad mix; speculation seeks high returns with higher risk; insurance hedges risk through contracts rather than by spreading investments. So diversification best lowers risk by varying the assets held.