Explanation

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

• Risk avoidance would mean not taking the risk at all (e.g., not investing in risky assets)
• Risk transfer involves shifting risk to another party (e.g., through insurance or derivatives)
• Risk retention means accepting the risk without taking action to reduce it
• Risk mitigation involves taking actions to reduce the severity or likelihood of risk

By diversifying the portfolio across different asset classes and correlations, Krista is reducing the overall portfolio risk while still maintaining exposure to the market. This doesn't eliminate risk entirely, but it reduces the impact of any single security's poor performance on the overall portfolio.

Diversification works because:

• Different asset classes have different risk-return characteristics
• Varying correlations means some assets may perform well when others perform poorly
• This reduces the portfolio's overall volatility without necessarily sacrificing expected returns