What is the term for a method that helps reduce investment risk?

Master personal finance with the DECA Personal Financial Literacy Exam. Use flashcards and multiple choice questions to deepen your understanding. Prepare for success with detailed explanations and expert tips!

The term for a method that helps reduce investment risk is diversification. This strategy involves spreading investments across various assets or asset classes, such as stocks, bonds, real estate, or different industries. By doing so, an investor minimizes the impact of a poor performance in any single investment on their overall portfolio. If one asset class declines in value, the losses can be offset by gains in other areas, leading to a more stable overall return. This is particularly important in managing risk, as it helps to lessen the potential volatility associated with investing in a single asset or sector.

In contrast to diversification, hedging involves taking specific positions in financial instruments to counterbalance potential losses, but it is more of a risk management strategy rather than a broad investment approach. Market timing refers to attempting to predict future market movements to buy or sell securities at optimal times, which can be quite risky and isn't guaranteed to reduce risk. Speculation, on the other hand, involves making high-risk investments with the hope of substantial returns, which typically increases risk rather than reduces it.

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