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Diversification is the practice of spreading investments across different types of assets to reduce risk. Here's a breakdown of the options provided:
1. Not basing your stock decisions on anything but diversity of that company's products:
This statement is incorrect. Diversification involves spreading investments across different assets to reduce risk, not solely focusing on one company's products.
2. Choosing investments from a variety of types such as real estate, stocks, and bonds:
This is a correct definition of diversification. By investing in a mix of asset classes like real estate, stocks, and bonds, investors can reduce the impact of a decline in any single investment type on their overall portfolio.
3. Buying products from the companies whose stock you own so they can add new products to their line:
This statement does not relate to diversification. It might refer to a strategy like patronizing companies in which you invest, but diversification pertains to spreading investments across different asset classes for risk management.
In summary, diversification involves investing in a mix of assets such as stocks, bonds, and real estate to minimize risk. It's about not putting all your eggs in one basket and spreading investments across different types of assets to achieve a balanced portfolio.
