Question

Why is diversification of investments important?
O It guarantees the investor will not have losses during inflation.
O It helps the investor avoid paying taxes on earnings.
O It spreads the investor's risk over several types of investments
O It shows the investor is skilled at selecting investments.
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Answer 1

Answer:

O It spreads the investor's risk over several types of investments

Explanation:

Diversification is the practice of spreading investments in different asset classes. It involves purchasing a variety of investment assets rather than a single asset.  Diversification spreads the risk associated with investments to the different categories of assets.

The main objective of diversifying is to minimize the risk.  Should a particular investment to move against expectations, the other assets help reduce the losses. The assets in a diversified investment are referred to as a portfolio.