Define diversification in the context of investment.

Diversification in the context of investment refers to the practice of spreading investments across various asset classes, sectors, or geographic regions to reduce overall risk. By including a range of diverse investments in a portfolio, investors can minimize the impact that any single asset's poor performance might have on the overall portfolio. This is based on the fundamental principle that different assets often respond differently to the same economic events; some may rise while others fall, thus balancing the risk.

This approach helps to create a more stable investment portfolio because it is unlikely that all investments will react negatively at the same time. Therefore, if one investment underperforms, others may still perform well, protecting the investor's capital and potentially leading to more consistent returns over time.

In contrast, options that highlight a narrower focus, such as investing primarily in high-yield opportunities or concentrating only within one sector, inherently increase risk. Also, attempts to time the market do not align with the principle of diversification, as they typically rely on speculation about market movements rather than a structured investment approach that mitigates risk.