What does a Diversified Portfolio primarily aim to mitigate?

What does a Diversified Portfolio primarily aim to mitigate?

• A. Market trends
• B. Investment risks
• C. Inflation impact
• D. Regulatory changes

Answer: (B)

A diversified portfolio primarily aims to mitigate investment risks. The concept of diversification is based on the principle that by spreading investments across various asset classes, sectors, or geographies, an investor can reduce the impact of any single asset or risk factor on the overall portfolio. When one investment performs poorly, another may perform well, thus smoothing out potential negative returns. This strategic allocation helps to lower the volatility of the portfolio and enhances the likelihood of achieving more stable long-term returns. By reducing the correlation between different investments, diversification effectively minimizes specific risks associated with individual securities or market segments, allowing for a more balanced risk-return profile. The focus on mitigating investment risks stands in contrast to the other options. While market trends, inflation impact, and regulatory changes can influence overall market dynamics and investment outcomes, diversification specifically addresses the risks individual investments pose within a portfolio.

A diversified portfolio primarily aims to mitigate investment risks. The concept of diversification is based on the principle that by spreading investments across various asset classes, sectors, or geographies, an investor can reduce the impact of any single asset or risk factor on the overall portfolio.

When one investment performs poorly, another may perform well, thus smoothing out potential negative returns. This strategic allocation helps to lower the volatility of the portfolio and enhances the likelihood of achieving more stable long-term returns. By reducing the correlation between different investments, diversification effectively minimizes specific risks associated with individual securities or market segments, allowing for a more balanced risk-return profile.

The focus on mitigating investment risks stands in contrast to the other options. While market trends, inflation impact, and regulatory changes can influence overall market dynamics and investment outcomes, diversification specifically addresses the risks individual investments pose within a portfolio.