Question

Why should a financial investor care about diversification?

Short answer

As it helps in the reduction of danger.

Step-by-step solution

Concept introduction

Diversification implies spreading your investments rather than placing all of your money in one stock.

Explanation of solution

Diversification is a strategy that prevents money from being invested solely in one instrument. Allocating money to various equities, funds, and other investments reduces risk. The goal of any financial investor is to make money. If they invest all of their wealth into one fund, would that fund face any future losses? It will be more likely to lose all at once. That is why investments are distributed across a number of equities, so that if the value of one drops, the value of the others rises to compensate and reduce the loss. Though this strategy does not guarantee against loss, it does reduce the risk, and the investor does not suffer.