How does diversification help reduce risk in an investment portfolio?

Diversification helps reduce risk in an investment portfolio by spreading investments across different assets, such as stocks, bonds, and real estate. By holding a variety of assets, the portfolio is less likely to be significantly impacted by the poor performance of any single investment. Different assets often respond differently to market conditions, so when some investments decline, others may perform well, balancing out potential losses. This strategy reduces the overall risk and volatility of the portfolio, making it more stable over time. However, while diversification reduces risk, it does not eliminate it entirely.