Which statement is consistent with the strategy of diversification in stock investment?
A) Buy all stocks in the stock market.
B) Pick stocks that you believe are undervalued.
C) Buy a mutual fund of a broad stock market index.
D) Buy and sell a stock at the same time.

Question

Quizplus · Accepted Answer

Buying a mutual fund of a broad stock market index, such as the S&P 500, provides diversification because it includes a large number of different stocks from various industries. This spreads out the risk among multiple companies and reduces the impact of any single stock's poor performance. Buying all stocks in the stock market (option A) is not practical or feasible for individual investors. Picking undervalued stocks (option B) involves individual stock analysis and is a more concentrated strategy. Buying and selling a stock at the same time (option D) is not diversification as it only involves one stock.

Which Statement Is Consistent with the Strategy of Diversification in Stock