Final answer:
The main reason investors diversify is to leverage the low correlation between asset returns to mitigate risk. Diversification balances the performance of a portfolio by including a mix of assets, which can reduce the impact of poor performance from any single investment.
Step-by-step explanation:
The main reason for diversification for an investor is to take advantage of the fact that returns on assets are not perfectly correlated. Diversification is a risk management strategy that involves spreading investments across various financial assets to reduce the risk associated with putting 'all your eggs in one basket'.
By investing in a range of companies through mechanisms such as mutual funds, investors can mitigate the risks inherent to investing in single stocks or bonds. This is because different assets often don't move in the same direction; when some investments perform poorly, others may perform well, thus balancing out the overall performance of the portfolio and reducing the likelihood of extreme fluctuations in value.
An investor’s portfolio can benefit from diversification since it can potentially lower risk without necessarily giving up returns. Furthermore, mutual funds offer the advantage of professional management and liquidity, making it easier for investors to maintain a diversified portfolio.