What does it mean to have a diversified investment portfolio?

A diversified investment portfolio refers to the strategy of spreading investments across various asset classes. This means that instead of putting all of your money into one type of investment—such as stocks, bonds, or real estate—you allocate your funds among different categories to reduce risk. By having a mix of asset classes, you can protect your portfolio from the volatility of any single investment.

For instance, if stocks perform poorly, other assets like bonds or real estate might perform well, balancing out potential losses. This approach leverages the idea that different investments react differently to market conditions. Through diversification, investors aim for a more stable overall return while decreasing the risk associated with market fluctuations.

The other options describe strategies that lack diversification, which could lead to higher risk. For instance, investing in a single asset class concentrates exposure and increases vulnerability to market changes. Similarly, holding only cash in savings does not take advantage of potential investment growth, and investing primarily in stocks leaves the portfolio susceptible to stock market downturns. Hence, option B accurately represents the concept of diversification in investment portfolios.