Which type of investment focuses on spreading capital across different asset classes to avoid risk?

The focus on spreading capital across different asset classes to minimize risk is best described by the concept of diversification. Diversification is a fundamental investment strategy that involves allocating resources among a variety of financial instruments, industries, and other categories to reduce the impact of any single asset’s poor performance on the overall portfolio. By spreading investments across different asset classes—such as stocks, bonds, and real estate—an investor is less vulnerable to fluctuations in any one area, leading to a more stable return over time.

In contrast, asset allocation refers more specifically to how an investor divides their investments among different asset categories, such as equities, fixed income, and cash equivalents. While asset allocation is related to diversification, it does not inherently focus on spreading capital specifically to mitigate risk as directly as diversification does.

Market timing involves attempting to predict future market movements to buy low and sell high, which carries its own set of risks and does not prioritize risk avoidance.

Speculation entails making high-risk investments in hopes of substantial returns, often based on market trends or forecasts, rather than on spreading risk through diversification strategies. Therefore, the correct choice that embodies the principle of spreading capital across various asset classes to avoid risk is diversification.