Why might an investor diversify their portfolio?

Diversification is a fundamental strategy in portfolio management aimed at reducing unsystematic risk, which is the risk that affects a particular company or industry. By spreading investments across various asset classes, sectors, or geographies, an investor can mitigate the potential negative impact of any single investment's poor performance.

When an investor diversifies their portfolio, they are leveraging the fact that different assets often react differently to the same economic event. For example, while one industry may decline due to an economic downturn, another may thrive under the same conditions. Therefore, by holding a varied mix of investments, the overall risk of the portfolio is lowered without fully sacrificing potential returns.

Minimizing unsystematic risk is crucial because it is avoidable through diversification. Unlike systematic risk, which cannot be eliminated (as it is associated with market-wide factors such as economic downturns), unsystematic risk can be reduced by selecting a range of investments in differing sectors and asset classes.

The other options reflect strategies that do not align with the objective of diversification. Increasing risk exposure does not relate to the goals of diversification, which aims to decrease risk. Concentrating on specific industries entails focusing investments, which is contrary to the core idea of diversification. Finally, pursuing higher fixed returns is