The correct answer is: B. Market risk.
Market risk is the risk that an investment will lose value due to changes in the overall market. Diversification can reduce market risk by spreading your money across different assets that are not perfectly correlated. This means that if one asset loses value, the others may not, or may even increase in value. This can help to protect your overall investment portfolio from losses.
Interest rate risk is the risk that an investment will lose value due to changes in interest rates. When interest rates go up, the value of bonds goes down. This is because bonds are essentially loans that you make to the government or a company. When interest rates go up, you can earn more interest on your savings, so people are less willing to buy bonds. This drives down the price of bonds.
Unique risk is the risk that an investment will lose value due to factors specific to that investment. For example, a company’s stock price could go down if the company has a bad earnings report. Unique risk can be reduced by diversification, but it cannot be eliminated completely.
Inflation risk is the risk that your investment will lose value due to inflation. When inflation goes up, the value of your money goes down. This means that if you invest in something that does not keep up with inflation, such as a savings account, your investment will lose value in real terms.
In conclusion, diversification reduces market risk by spreading your money across different assets that are not perfectly correlated. This means that if one asset loses value, the others may not, or may even increase in value. This can help to protect your overall investment portfolio from losses.