Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

Question

BlackTom AI · Accepted Answer

Let’s break down the options and relate them to the concept of reducing risk through a mix of assets.
Option 1: Systematic. This term refers to risk that affects the entire market or broad segments of it (also called systematic risk). It does not describe the practice of combining many different assets to lower overall risk, so this is not the right label for the described practice.
Option 2: Unsystematic. This is the risk specific to a single asset or a small group of assets, which diversification aims to reduce. However, the term itself denotes the type of risk rather than the strategy or practice of combining assets to mitigate risk, so it’s not the best fit for describing the practice.
Option 3: Diversification. This is the term that exactly matches the practice of investing in a variety of diverse assets to reduce risk by spreading exposure across different asset classes, sectors, or geographic regions. It directly captures the strategy described in the question.
Option 4: Security market line. The SML is a graphical representation from the Capital Asset Pricing Model that shows the expected return of an asset as a function of its systematic risk (beta). It’s a concept related to pricing risk, not the practice of diversification itself.
Option 5: Capital asset pricing model. The CAPM explains the relationship between risk and expected return for assets, tying in beta and market risk premium, but it is not the term for the diversification practice described.
In summary, the concept described in the question aligns with the strategy of spreading investments to reduce risk, which is encapsulated by the term diversification rather than the other options. The remaining terms either refer to types of risk, pricing models, or theoretical constructs rather than the specific practice of combining assets to achieve risk reduction.

Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?单项选择题

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