What financial concept refers to the capacity to manage and distribute risk?

The correct choice is based on the concept of diversification, which is a fundamental strategy used in finance to manage and distribute risk across a portfolio. Diversification involves spreading investments across various financial instruments, industries, and other categories to reduce the impact of any single asset's poor performance on the overall portfolio. By holding a mix of investments, the negative performance of some assets can be offset by the positive performance of others, thus lowering the potential volatility of returns and decreasing the total risk exposure.

In contrast, speculation involves making high-risk investments with the expectation of significant returns, which does not inherently include a risk management strategy. Leverage refers to using borrowed funds to increase the potential return on investment, which can amplify both gains and losses but does not address risk distribution across different assets. Hedging is a strategy intended to offset potential losses in investments by taking an opposite position, but it is more about protecting against specific risks rather than managing overall portfolio risk through diversification. Hence, the capacity to manage and distribute risk effectively is best captured through the concept of diversification.