What does diversification in investment aim to achieve?

Diversification in investment primarily aims to combine a variety of investments to reduce overall risk. The rationale behind diversification is that by spreading investments across a wide array of assets, the investor can mitigate the impact that any single asset's poor performance may have on their overall portfolio.

By holding a mix of asset types, such as stocks, bonds, real estate, and commodities, the fluctuations in one part of the portfolio may be offset by the stability or growth in another. This balance helps to smooth out returns over time and decreases the highs and lows associated with market volatility, ultimately leading to a more stable investment experience.

Maximizing returns from a single investment does not align with the principles of diversification, which rather encourages a more balanced approach. Similarly, concentrating funds in high-yield stocks can increase risk significantly, as these stocks may be more volatile and more susceptible to market changes. Finally, it’s important to note that diversification cannot eliminate all forms of investment risk, such as systemic risk that affects the entire market; instead, it can only help manage and lower overall risk exposure.