What is a benefit of diversification in an investment portfolio?

Diversification in an investment portfolio is a strategy that involves spreading investments across various assets or asset classes to reduce risk. By holding a variety of investments—such as stocks, bonds, real estate, and other securities—an investor can mitigate the impact of any single asset's poor performance on the entire portfolio.

When one investment underperforms, others may perform well and help balance out potential losses. This reduces the overall volatility of the portfolio and gives it a smoother performance over time. Thus, the primary benefit of diversification is that it effectively lowers the risk associated with investing by not allowing one poor investment to disproportionately affect an investor’s total returns.

The incorrect options suggest that diversification can guarantee higher returns, eliminate all risks, or ensure steady income, which are unrealistic expectations. While diversification helps in managing risk, it cannot eliminate it altogether, nor can it guarantee profits or a consistent income stream from investments.