What is the purpose of diversification in investment?

Diversification in investment primarily serves to spread risk across various investments. By investing in a mix of different assets, such as stocks, bonds, real estate, and other financial instruments, an investor can reduce the impact of any single investment's poor performance on the overall portfolio. This strategy is based on the principle that different assets often react differently to market changes; while one investment might lose value, another might gain, thus providing a buffer against potential losses.

This approach is essential for risk management, especially in volatile markets, as it helps to mitigate the exposure to any one particular risk. A well-diversified portfolio is less likely to experience drastic value fluctuations compared to a concentrated portfolio focused on a limited number of investments. Additionally, diversification can enhance the potential for returns, as it allows investors to capitalize on varying performance across different sectors and asset classes.

The other options do not capture the essence of diversification. Maximizing profits from a single investment or concentrating funds in high-yield investments can expose an investor to higher risks and volatility. Limiting the types of investments available contradicts the fundamental concept of diversification, which aims to broaden the scope of the portfolio to buffer against risk.