Which statement about diversification across asset classes and geographic exposures is correct?

• A. To diversify across asset classes and geographic exposures to reduce risk.
• B. To focus investments in a single market to maximize gains.
• C. To increase taxes paid on gains.
• D. To eliminate the need to rebalance.

Answer: (D)

Diversification across asset classes and geographic exposures works because different investments respond differently to the same economic conditions. When you mix stocks, bonds, real estate, and other asset types, their prices don’t move in lockstep. This means if one area falls, others may hold up or rise, helping to smooth overall portfolio returns and reduce risk.

Adding geographic diversification spreads exposure across economies that can perform at different speeds and face distinct shocks. A downturn in one country might be offset by stability or growth elsewhere, further damping overall volatility.

So the best statement captures the core goal of diversification: reducing risk by not putting all eggs in one basket. It doesn’t guarantee maximum gains, it doesn’t inherently raise taxes as a result of diversification, and it doesn’t remove the need to rebalance, since asset weights drift over time and rebalancing helps maintain the intended risk and return profile.