What is a key benefit of diversification in investment portfolios?

A key benefit of diversification in investment portfolios is the reduction of risk. Diversification involves spreading investments across various assets, sectors, or geographic locations to minimize the impact of any single asset's poor performance on the overall portfolio. By holding a mix of investments, the negative performance of some investments can be offset by the positive performance of others, which helps stabilize returns.

This strategy is based on the principle that different asset classes often react differently to the same economic events. For instance, during a market downturn, some assets may lose value while others may remain stable or even appreciate. Therefore, diversification can help investors achieve a more balanced risk profile and reduce overall volatility in their portfolios.

Considering the other options, higher risk contradicts the purpose of diversification, as it aims to lower risk rather than increase it. While consistent returns can be a desirable outcome of a well-diversified portfolio, they are not guaranteed and depend on various market conditions. Immediate liquidity refers to how quickly an asset can be converted into cash, which is not directly related to the benefits of diversification. Thus, the primary advantage of diversification lies in its ability to reduce risk.