A pension fund manages risk by investing in a broad portfolio of different financial assets, such as stocks and bonds from various industries. Which of the following actions by a bank best illustrates the same underlying principle of risk management?

Risk Management in Financial Institutions

Risk Diversification in Financial Institutions

Evaluating Risk Diversification in Financial Institutions

A bank making a single, large loan to a highly reputable, financially stable corporation is employing the same fundamental risk diversification strategy as a pension fund that invests equally across 100 different startup companies.

A pension fund minimizes the potential negative impact of a single poor-performing stock by investing in a wide variety of different companies. Similarly, a commercial bank minimizes its risk of default by distributing its loans across a wide variety of different ____.

Arrange the following statements into a logical sequence that explains the parallel between how an investment-focused institution and a loan-focused institution manage risk through diversification.

Analyzing the Impact of Diversification Failure

An analyst observes two financial institutions. Institution A, a bank, has concentrated 90% of its loans in the commercial real-estate sector of a single city. Institution B, a pension fund, has invested 90% of its capital in a wide range of technology companies, from startups to established giants. Based on the principle of spreading risk, which statement provides the most accurate evaluation of their strategies?