Which of the following is a strategy to mitigate investment risk?

Which of the following is a strategy to mitigate investment risk?

• A. Investment concentration
• B. Hedging strategies
• C. Market timing
• D. Emotional trading

Answer: (B)

Hedging strategies are a widely recognized method for managing and mitigating investment risk. These strategies involve taking positions in financial instruments that are designed to offset potential losses in other investments. For instance, an investor might use options, futures, or other derivatives to protect against adverse price movements in an asset they own. By doing so, the investor can limit exposure to volatile market movements and safeguard their portfolio from unpredictable changes, thus reducing the overall level of risk. Other approaches, such as investment concentration, typically increase risk because they focus on a narrow range of assets. Market timing attempts to predict the best moments to enter or exit the market, which is highly challenging and can lead to significant losses if timed poorly. Emotional trading, driven by psychological factors, often leads to impulsive decisions and increased risk rather than a calculated strategy for mitigating it. Therefore, hedging stands out as a structured approach aimed directly at reducing the inherent risks associated with investment activities.

Hedging strategies are a widely recognized method for managing and mitigating investment risk. These strategies involve taking positions in financial instruments that are designed to offset potential losses in other investments. For instance, an investor might use options, futures, or other derivatives to protect against adverse price movements in an asset they own. By doing so, the investor can limit exposure to volatile market movements and safeguard their portfolio from unpredictable changes, thus reducing the overall level of risk.

Other approaches, such as investment concentration, typically increase risk because they focus on a narrow range of assets. Market timing attempts to predict the best moments to enter or exit the market, which is highly challenging and can lead to significant losses if timed poorly. Emotional trading, driven by psychological factors, often leads to impulsive decisions and increased risk rather than a calculated strategy for mitigating it. Therefore, hedging stands out as a structured approach aimed directly at reducing the inherent risks associated with investment activities.