Risk diversification refers to the process by which:
A) people organize themselves in a group to collectively absorb the cost of the risk faced by each individual.
B) insurance companies change the risk aversion of their clients.
C) risks are shared across many different assets or people, reducing the impact of any particular risk on any one individual.
D) insurance companies reallocate the likelihood of catastrophes happening.

Question

Quizplus · Accepted Answer

Risk diversification means spreading risks across different assets or people. By doing so, the impact of any particular risk on any one individual is reduced. This is a common strategy used by investors to manage their portfolio risk. It is not about organizing in a group or changing risk aversion, as in options A and B, respectively. Insurance companies can be one of the mechanisms for risk diversification, but they do not reallocate the likelihood of catastrophes happening, as in option D.

Risk Diversification Refers to the Process by Which