What is a strategy for reducing risk by buying a variety of items so that the failure of one does not doom the entire portfolio?

Prepare for the Management and Organization Module 6 (06-MGMT-ORG) – Strategy Exam. Engage with flashcards, multiple choice questions, hints, and explanations. Excel in your exam!

The correct approach for minimizing risk through a varied selection of investments or items is diversification. This strategy involves spreading capital across different assets, industries, or markets, which helps to mitigate the potential adverse effects on the portfolio if one asset or sector underperforms. By diversifying, an investor can balance the losses of poorly performing investments against those that are performing well, thus stabilizing the overall financial outcome.

For instance, if an investor puts money into both stocks and bonds, and the stock market suffers a downturn, the bonds may still perform well, reducing the overall impact on the investor’s wealth. In essence, diversification allows for a more stable return and lowers the risk of total loss.

Other strategies such as downsizing, retrenchment, and exit planning focus on different organizational tactics, such as reducing operational scale or divesting from certain areas of business, rather than spreading risk across a portfolio. These strategies do not inherently address the concept of risk reduction through varied investments as effectively as diversification does.

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