What does diversification in investment portfolios aim to achieve?

Diversification in investment portfolios aims to mitigate risk by spreading investments across various asset types. When an investor diversifies their portfolio, they allocate resources among different categories of assets, such as stocks, bonds, real estate, and commodities. This strategy helps to protect the overall investment from the volatility associated with any single asset or market sector.

By investing in a variety of assets, the poor performance of one investment can potentially be offset by the better performance of another, reducing the overall risk of loss. This concept is grounded in the idea that different assets respond differently to economic events, so a well-diversified portfolio can offer more stable returns over time.

Maximizing profits from a single investment is contrary to the principles of diversification, as it puts all capital at risk associated with one particular asset. Focusing solely on international markets or investing exclusively in bonds would limit the breadth of an investment strategy, leading to heightened exposure to market-specific risks and a lack of the stabilizing effect usually sought through diversification. Thus, the correct answer highlights the primary purpose of diversification: to mitigate risk through a balanced investment strategy.