What is a primary reason to diversify across asset classes?

• A. To balance risk and return and align with goals and time horizon.
• B. To guarantee never losing money.
• C. To maximize short-term trading profits.
• D. To avoid paying taxes on gains.

Answer: (A)

Diversification across asset classes helps manage risk while pursuing a reasonable return by mixing investments that don’t move together in the same way. Different asset classes—like stocks, bonds, and real estate—often respond differently to economic conditions, so when one area falls, another may hold up or rise, smoothing overall portfolio outcomes. The main reason to diversify is to balance risk and potential return in a way that fits your goals and time horizon. It’s about reducing unsystematic risk and aligning the plan with how long you have to invest and what you’re aiming to achieve. This approach does not guarantee you won’t lose money, nor does it maximize short-term profits or avoid taxes.