What is the term for spreading your money across different types of investments to reduce risk?

• A. Risk Tolerance
• B. Investment Risk
• C. Roth IRA
• D. Diversification

Answer: (D)

Diversification is spreading your money across different investments to reduce risk. The idea is to mix assets that don’t move in lockstep, so if one area drops, others may hold steady or rise, helping smooth overall returns. By including a mix of asset classes (like stocks, bonds, and cash), and possibly different sectors or regions, you lower the chance that a single poor performer drags down your entire portfolio. This mainly reduces unsystematic risk—the risk tied to individual companies or industries—while leaving you still exposed to market-wide risk that affects many assets at once. A practical way to diversify is through broad-market funds like index funds or ETFs, or by balancing across asset categories and rebalancing over time to maintain your target mix. The other options don’t describe this approach: risk tolerance is about how much loss you can handle, investment risk refers to the general chance of losing money, and a Roth IRA is simply a type of retirement account.