Which of the following is an example of risk diversification?
A) an insurance company writing earthquake insurance only for the Los Angeles area
B) an individual investing all of her savings in a single, new firm
C) an individual purchasing only IBM stock
D) a lumber mill purchasing trees from various forests across the western United States

Question

Quizplus · Accepted Answer

Diversification is the practice of investing in different assets with different risks and returns. Option D demonstrates diversification by purchasing trees from various forests across the western United States. By doing so, the lumber mill is spreading its risk among different types of trees, locations, and potential risks such as fires or disease. The other options do not demonstrate diversification as they involve concentration of risk in a single area, investment or stock.

Which of the Following Is an Example of Risk Diversification