W!SE Financial Literacy Certification Practice Test 2025 – Your All-in-One Guide to Exam Success!

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What does diversification in investing mean?

Investing all money into one asset

Spreading investments across different assets

Diversification in investing refers to the strategy of spreading investments across a variety of different assets. This approach helps to mitigate risk because it ensures that the performance of one single investment has less impact on the overall portfolio. For example, if one asset class, such as stocks, experiences a decline, other assets like bonds or real estate may perform well, balancing the overall returns.

By diversifying, investors can potentially achieve more stable returns over time. This strategy is based on the principle that different assets often respond differently to economic changes. Therefore, having a mix of asset types can help in managing volatility and reducing the potential for losses.

The emphasis on diversification is crucial for building a resilient investment portfolio, making it a foundational concept in financial literacy and investing.

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Reducing investments to lower expenses

Concentrating on high-risk stocks only

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