How does diversification benefit an investment portfolio?

Diversification benefits an investment portfolio primarily by reducing the impact of individual asset volatility. When an investor diversifies, they spread their investments across various asset classes or securities that typically do not move in the same direction or to the same degree. As a result, when one specific investment experiences a downturn, others may perform well or remain stable, thereby cushioning the overall portfolio against significant losses.

This strategy helps to manage risk by ensuring that no single investment has the potential to heavily influence the portfolio's total value. It allows for a more stable investment experience over time, as the effects of volatility from any one position are minimized. In the context of managing risk, the goal of diversification is not to eliminate it but to create a balanced approach that can lead to more consistent performance.

The other choices do not accurately reflect the primary advantage of diversification. While it may expose an investor to a mix of returns, it does not focus on maximizing short-term returns or guaranteeing stability. Additionally, it does not inherently increase exposure to high-risk investments; rather, it encourages a mix of risk levels to balance potential rewards with risk management.