Elena is excited to invest, but she is worried that she might lose her investment funds by making risky investments. How could Elena use diversification to manage her risk?

Question

Elena could forego investing altogether.
Elena could purchase multiple assets from multiple sources.
Elena could invest all of her funds into a single low-risk investment.
Elena could invest some of her funds into a single low-risk investment and pocket the rest as cash.

Answer 1

Elena could manage her risk through diversification by choosing the option:

Elena could purchase multiple assets from multiple sources.

By investing in a variety of assets—such as stocks, bonds, real estate, and other investment vehicles—from different industries and geographic locations, she can reduce the overall risk of her investment portfolio. This way, if one investment performs poorly, the impact on her total investment is minimized because other assets may still perform well. Diversification helps protect against significant losses and can lead to a more stable investment return over time.