Question

Why should a financial investor care about

diversification?

Short answer

Diversification is important to a business endeavor since it helps to reduce risk.

Step-by-step solution

Definition of Diversification.

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

Explanation of solution.

Diversification is a strategy that prevents cash from being invested solely in one asset. The ability to allocate money to private 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.