Define 'diversification' in investment.

Diversification in investment refers to the strategy of spreading investments across various financial instruments, sectors, or other categories to reduce risk. This approach allows investors to minimize exposure to any single asset or risk factor, which can protect against significant losses if one investment underperforms. By diversifying, investors can achieve a more stable and balanced investment portfolio, as the performance of different assets often varies, leading to potential gains in some areas even if others are struggling.

The core principle of diversification is rooted in the idea that not all investments react the same way to market changes; thus, balancing different asset types or sectors can smooth out overall portfolio performance. For example, when an equity market may experience declines, fixed-income investments could act as a buffer, mitigating losses.

In contrast, the other choices focus on more concentrated investment strategies, such as investing in a single asset, a specific industry, or only government bonds, which do not provide the risk-reduction benefits associated with diversification. Concentrating investments can lead to higher risks if those specific investments perform poorly, highlighting the advantages of a diversified investment approach.