Edmentum Personal Finance Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

Investing in a mutual fund is considered less risky than investing in a specific company's stock primarily because mutual funds hold a diversified portfolio of stocks. This diversification spreads the investment risk across multiple assets. When you invest in a single company's stock, your financial fate is tied to that one company’s performance; if the company struggles or fails, your investment could suffer significant losses.

On the other hand, a mutual fund typically includes various stocks from different companies and sectors, which helps mitigate the impact of an individual stock's poor performance on the overall investment. If one company in the mutual fund performs poorly, the other stocks in the fund can help cushion that loss, as they may perform better or remain stable. This reduces the overall volatility and risk associated with the investment.

While mutual funds may indeed invest in blue-chip stocks or offer liquidity, these factors do not inherently reduce risk compared to investing in individual stocks. Similarly, while some mutual funds may provide higher returns, this is not a defining characteristic of mutual funds and does not necessarily equate to lower risk. Therefore, diversification remains the key reason why mutual funds are often viewed as a safer investment choice.