What does diversification in financial investment refer to?

Diversification in financial investment refers to the strategy of spreading investments across various financial instruments, industries, and other categories to reduce risk. The underlying principle is that different assets often react differently to the same economic events. By diversifying, an investor can minimize the impact of a poor-performing investment on the overall portfolio. This strategy helps in balancing risk and can lead to more stable returns over time.

When a portfolio is diversified, the correlation between the assets means that if one investment decreases in value, others might increase or hold steady, which lessens overall volatility. This approach is a fundamental principle in portfolio management and is widely recommended to investors looking for long-term growth with a moderated level of risk.

The other options illustrate concepts contrary to the idea of diversification. Concentrating investments in one area increases risk because the portfolio becomes heavily dependent on the performance of a single investment or sector. Withdrawing investments from multiple assets does not promote diversification; it suggests a reduction of exposure rather than balancing it. Lastly, purchasing only high-risk stocks ignores the principle of risk management; such an approach could lead to significant losses without the buffer that diversification provides.