In finance, what does diversification refer to?

Diversification is a fundamental risk management strategy in finance that involves spreading investments across a range of assets. This helps to mitigate the impact of poor performance in any single investment by balancing it out with others that may perform well. By mixing a variety of investments, such as stocks, bonds, real estate, or commodities, investors aim to decrease their overall risk while still maintaining potential for returns.

This practice is based on the principle that different assets react differently to market conditions, meaning that when some investments decline, others may remain stable or increase, thus providing a cushion against losses. Diversification contributes to a more resilient investment portfolio, enabling better risk-adjusted returns over the long term.

The other options do not accurately depict the concept of diversification. Investing all funds into a single stock signifies a lack of diversification, while increasing profitability of a single investment or reducing operational costs does not relate to the investment strategy of spreading risk across various assets.