What is the primary goal of portfolio diversification?

The primary goal of portfolio diversification is to reduce risk by offsetting losses with gains. Diversification involves spreading investments across various assets, sectors, or geographical regions, which helps to mitigate the impact of poor performance from any single investment. When one investment experiences a loss, others may perform well, thereby cushioning the overall portfolio from significant downturns.

This strategy operates on the principle that different assets often respond differently to the same economic events. For instance, during economic downturns, certain sectors, such as consumer staples, may perform better than high-growth technology stocks. By diversifying, an investor can achieve a more stable return profile and avoid the volatility associated with having a concentrated position in a few high-risk or individual securities.

Maximizing returns on a single investment would contradict the essence of diversification, which seeks to balance risk and return across a broader spectrum. Focusing solely on high-risk investments or concentrating assets in one class limits the ability to buffer against potential losses, which goes against the fundamental principle of risk management through diversification. Hence, the correct answer emphasizes the risk-reducing benefits that diversification can offer to an investment portfolio.