In investment management, what does "diversification" aim to achieve?

Diversification in investment management aims to reduce risk by spreading investments across various assets. The fundamental principle behind diversification is that different assets often react differently to the same economic events. When an investor diversifies their portfolio, they include a variety of asset classes, such as stocks, bonds, real estate, and commodities, among others. This approach helps mitigate the impact of poor performance from any single investment.

For example, if one asset class experiences a downturn, the overall impact on the portfolio may be cushioned by the better performance of other asset classes. This process of spreading investments can enhance stability and lower the overall risk profile of the portfolio, making it less susceptible to the volatility of individual securities or sectors.

The other options reflect strategies that do not align with the purpose of diversification. Maximizing returns on a single asset would actually increase risk rather than reduce it. Concentrating investments in trending sectors may lead to higher volatility due to the impact of sector-specific risks. Increasing overall volatility contradicts the essence of diversification, which is to create a more stable and less volatile investment experience.