Question

Why is investing in a mutual fund less risky than investing in a particular company’s stock?

a.)Mutual funds only invest in blue-chip stocks.
b.)Investments in mutual funds are more liquid.
c.)Mutual funds hold a diversified portfolio of stocks.
d.)Investments in mutual funds offer a higher rate of return.

Answer 1

C

Step-by-step explanation:

Answer 2

Risk is measured by the probability of loss. If one invested everything he had in 1 specific stock, and that stock drops in a major way, then he loses a lot. This is a high-risk setup. On the other hand, if one divides his portfolio into several stocks, then his risk is much lower, because it is less likely that all those stocks drop at the same time. So this is how mutual funds diversify their portfolios to lower risk, and the right answer is C.