Which term describes a savings strategy that helps protect against the risk of a single investment underperforming?

• A. Diversification
• B. Risk Tolerance
• C. Investment Risk
• D. Tax-Advantaged Account

Answer: (A)

Diversification spreads money across different types of investments and sectors so that the poor performance of one investment doesn’t dramatically hurt the whole portfolio. By not putting all eggs in one basket, you reduce unsystematic risk—the risk tied to a single asset or industry. If one investment underperforms, others may offset those losses, helping to stabilize overall returns over time. This concept is distinct from risk tolerance (how much risk you’re willing to take), investment risk (the general chance of loss in investing), and tax-advantaged accounts (accounts with tax benefits, not a diversification strategy).