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Which of the following is a way to reduce financial risk? a) to only buy stock in a major company...

Question:

Which of the following is a way to reduce financial risk?

a) to only buy stock in a major company

b) to only buy bonds in a major company

c) to diversify in a variety of assets, both financial and physical

d) to diversify in a number of banks.

Financial Risk:

Financial risk is a term used in finance and investments. It refers to the risk that investors face by investing in the financial markets. That risk is the danger of losing money. Investors do many things to guard against this risk, including the purchase of options and other derivative assets to manage risk.

Answer and Explanation:

The answer is: c) to diversify in a variety of assets, both financial and physical . The best way to reduce financial risk is by diversifying the number of assets, both financial and physical, you have in your portfolio. By doing this, you can guard against large losses due to a decrease in one market. By investing in multiple markets you can spread your risk. In other words, you don't want to put all your eggs in one basket. Diversifying the banks you put your investments in doesn't help to reduce financial risk if all your investments are in the same market.


Learn more about this topic:

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Financial Risk: Types, Examples & Management Methods

from Finance 305: Risk Management

Chapter 1 / Lesson 4
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