What action does diversification help to achieve in an investment portfolio?

Diversification is a fundamental concept in investment strategy that aims to reduce overall investment risk. By spreading investments across a variety of asset classes, sectors, or geographies, an investor can lower the portfolio's exposure to any single source of risk. This is because different assets often respond differently to market conditions. For instance, while stocks might perform well in a robust economy, bonds might offer stability during periods of economic downturn.

When an investment portfolio is diversified, poor performance in one asset can be offset by better performance in others, thereby smoothing overall returns and mitigating volatility. This risk reduction is crucial for maintaining financial stability and achieving long-term investment goals, making diversification a key strategy for prudent asset management.

Options that suggest maximizing risk exposure or increasing complication in asset management do not align with the primary objective of diversification. Similarly, while enhancing specific asset performance might be a goal for individual investments, diversification itself does not focus on the performance of any single asset; rather, it emphasizes the collective risk profile of the entire portfolio.