Explanation

Diversification is a classic example of risk mitigation. Here's why:

• Risk avoidance would mean completely avoiding the risk (not investing at all)
• Risk transfer would involve shifting the risk to another party (like through insurance or derivatives)
• Risk retention would mean accepting the risk without taking action to reduce it
• Risk mitigation involves taking actions to reduce the impact or likelihood of risk

Diversification works by:

• Reducing exposure to any single asset or sector
• Lowering the frequency of extreme losses through correlation management
• Decreasing the severity of portfolio losses by spreading risk across different asset classes

This aligns perfectly with the definition of risk mitigation: "Risks can be mitigated by reducing exposure, frequency, and severity."