Question

Why would a mutual fund, a collection of stocks, bonds, and other securities, have less risk than investing in stocks alone?
a.
Stocks are higher risk than most other securities in a mutual fund, but when averaged with the risk of the other securities, mutual fund risk is not as high as stock risk.
b.
Mutual funds are controlled primarily by their investors, and those investors would do anything they could to keep their mutual fund from decreasing in value.
c.
Because mutual funds eliminate the middle man, there is far less room for error and higher chance for greater profit.
d.
Mutual funds, by nature, are a mutual agreement between company and investor, and failure to comply on either side presents reprecussions, the fear of which lowers the risk of the investment.

Answer 1

a.

Mutual funds reduce risk mainly through diversification — holding many different stocks, bonds and other securities spreads and thereby reduces unsystematic (firm‑specific) risk. (They still have market/systematic risk.)