Multiple Choice
When creating a budget, fixed expenses should be logged:
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1. Introduction to Accounting
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Diversification reduces your __________ by using a mix of investment types in your portfolio.
A
tax liability
B
interest rate
C
risk
D
income
Verified step by step guidance1
Understand the concept of diversification: Diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, or other categories to reduce exposure to any single asset or risk.
Identify the key term in the question: The question is asking what diversification reduces. The options provided are 'tax liability,' 'interest rate,' 'risk,' and 'income.'
Analyze the options: Tax liability refers to the amount of tax owed, which is unrelated to diversification. Interest rate is a cost of borrowing or return on investment, also unrelated. Income refers to earnings, which diversification does not directly impact. Risk, however, is directly related to diversification as it aims to minimize the potential for loss.
Connect diversification to risk reduction: By investing in a mix of asset types (e.g., stocks, bonds, real estate), diversification reduces the impact of poor performance in any single investment, thereby lowering overall portfolio risk.
Conclude that the correct answer is 'risk': Diversification is a strategy specifically designed to reduce risk in an investment portfolio.
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