Managing Market Risk Through Diversification

In portfolio management, understanding and managing market risk is crucial for investors. Market risk refers to the potential losses in an investment due to market fluctuations. One common approach to mitigate market risk is through the use of diversification. For instance, an investor holding a variety of asset classes may be less exposed to the risks presented by adverse market movements in a specific asset class.

Which of the following strategies best describes how an investor can manage market risk effectively?