what does diversification do to risk?

Diversification is a risk management strategy that aims to reduce the overall risk of an investment portfolio. It involves spreading investments across different asset classes, industries, sectors, and geographic regions. By doing so, diversification can help lower the impact of any one investment or group of investments on the overall portfolio.

Diversification works on the principle that not all investments will perform in the same way. Different assets may vary in their performance due to various factors such as economic conditions, market trends, and company-specific events. When you diversify your portfolio, you are essentially seeking to reduce the correlation of returns among your investments.

By holding a diverse mix of assets, you can reduce the potential downside risk. If one investment or sector underperforms, the positive performance of other investments may help offset the losses. This can help to stabilize the overall value of the portfolio.

In summary, diversification distributes your investments across different assets, which can reduce the impact of any single investment's poor performance on your overall portfolio. It is important to note that diversification does not eliminate all risk, but it can help manage and reduce risk to improve the chances of achieving more consistent and stable returns over the long term.