Which of the following is a risk associated with lack of diversification?

The correct choice highlights a critical principle of investing - diversification. When a portfolio lacks diversification, it tends to hold a concentrated position in a few assets or sectors. This concentration increases the risk of substantial losses because if those specific assets perform poorly or if the particular sector experiences a downturn, the entire portfolio could suffer significantly.

Higher exposure to market volatility means that the value of the portfolio can fluctuate dramatically with market changes, leading to unpredictability in returns. Conversely, a well-diversified portfolio spreads risk across a variety of assets, which generally leads to more stable returns because the losses in one area can potentially be offset by gains in another. This concept emphasizes the importance of diversification as a risk management strategy in personal finance.

In contrast, other available choices do not accurately describe the implications of a lack of diversification. While the potential for stable returns and guaranteed profits suggests a lower risk, these outcomes are not realistic in the absence of diversification. Additionally, reduced investment complexity may seem appealing, but it does not address the underlying risk factors that arise from failing to diversify. Therefore, higher exposure to market volatility is indeed a significant risk associated with lack of diversification.