DECA Financial Consulting Complete Practice Exam

Diversification is a fundamental investment strategy that involves spreading investments across a variety of assets to mitigate risk. By holding a diversified portfolio that includes different asset classes, industries, and geographic regions, investors can reduce their exposure to any single investment's poor performance. This is because the negative performance of one investment may be offset by the positive performance of others, leading to more stable overall returns.

For example, if one sector of the market experiences a downturn, investors with a diversified portfolio are less likely to see a significant drop in their overall portfolio value, as other sectors or asset types may be performing well. This risk reduction mechanism is particularly important for individual investors, as it helps to provide a buffer against volatility and unexpected events that can impact specific markets or assets.

Overall, diversification is a key component of a prudent investment strategy, aiming to balance the potential for returns with acceptable levels of risk.