Diversification is the process of reducing risk by combining a large number of small risks whose outcomes are not closely related. By doing this, the overall risk is spread out and lessened. It is not a gamble or a change in the nature of risk. Breaking a big risk into many smaller risks is called fragmentation.

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Diversification Is

Question 73

Multiple Choice

Diversification is:

A) breaking a big risk into many smaller risks so that it can be spread over many people.
B) reducing risk by combining a large number of small risks whose outcomes are not closely related.
C) a gamble that, on average, allows the risk to be spread out into small parts to make it smaller.
D) a reduction in risk that comes from changing the nature of risk into something else that is less risky.

Correct Answer: