What strategic approach can businesses use to mitigate market risk?

Diversifying investment portfolios across various asset classes is a strategic approach that helps mitigate market risk by spreading out potential risk across different investment types. When investments are diversified, the performance of one asset class may offset the poor performance of another; this creates a kind of cushion against volatility. For instance, if equities are performing poorly, bonds or real estate may still perform well, stabilizing the overall portfolio return.

This strategy takes advantage of the fact that different asset classes often react differently to the same economic events. By holding a mix of asset classes—such as stocks, bonds, real estate, and commodities—investors can reduce the impact of any single asset class's poor performance on their total investment.

In contrast, concentrating investments in one asset class or investing solely in government securities exposes an investor to higher risks associated with that specific asset type and limits potential returns. Decreasing overall market exposure can also reduce risk but may simultaneously limit growth opportunities, which might not be aligned with an investor's long-term financial goals. Thus, diversification stands as the most effective approach among the options for managing market risk effectively.