Why is diversification important in investment?

Diversification is important in investment because it limits risk across various asset classes. By spreading investments across a range of different assets, such as stocks, bonds, real estate, and other securities, an investor can reduce the impact of any single asset's poor performance on the overall portfolio. When one investment underperforms, others may perform well, balancing out potential losses. This strategy aims to create a more stable and resilient investment portfolio, helping to protect against market volatility and economic downturns.

The other options do not accurately reflect the primary benefit of diversification. For example, diversification does not guarantee maximum profits; it aims to manage risk rather than ensure high returns. Additionally, while diversification can improve liquidity in certain contexts, it is not primarily about the ease of liquidating assets. Lastly, diversification does not inherently help in predicting market trends, as it focuses more on risk management than market forecasting.