How is diversification related to risk?

Diversification is a risk management strategy that involves spreading investments across various assets or sectors to reduce exposure to any single investment's volatility. By holding a diverse portfolio, the impact of poor performance in one asset can be offset by better performance in others, thereby lowering overall risk. This approach limits the potential for significant losses and helps stabilize returns over time. Essentially, diversification helps to smooth out the unpredictable nature of markets and minimizes the likelihood of catastrophic financial outcomes.