Final answer:
Diversification reduces risk by using a mix of investment types in your portfolio.
Step-by-step explanation:
Diversification is a strategy that reduces risk by spreading investments across different types of assets in a portfolio. By investing in a mix of stocks, bonds, and mutual funds, investors can potentially minimize the negative impact of any individual investment's performance. For example, if one stock performs poorly, the gains from other stocks or bonds in the portfolio can help offset the loss.