FRM Financial Risk Manager Practice Test

This strategy is called diversification. The power of diversification means that when Tom diversifies his portfolio into different assets (i.e. investing in different assets at the same time), he reduces his risk dramatically.

Key Takeaway: Diversification helps prevent the risk of investing into a single asset whose price can fluctuate and be unpredictable. By spreading out the investment into various assets, the risk from fluctuations can be reduced.