Final answer:
A well-diversified portfolio aims to reduce unsystematic risk through investments spread across a sufficient number of securities, resulting in a more stable overall performance and mitigating the impact of individual asset volatility.
Step-by-step explanation:
A well-diversified portfolio is one that minimizes nonsystematic risk to the point where it is essentially zero. This diversification is not necessarily about having equal weights in all assets or securities from three different industries. Rather, it means spreading investments over a large enough number of securities so that the performance of any one security has a minimal impact on the overall performance of the portfolio. Diversification helps stabilize a portfolio against the unpredictability of individual securities.
For instance, by owning stocks in different sectors, industries, and even different countries, the negative performance of one stock or sector may be balanced out by the positive performance of others. The goal of diversification is to reduce the overall risk by investing in a variety of assets, which, as part of a mutual fund or other investment vehicle, can lead to a more stable set of returns over time.