What does a diversified portfolio primarily aim to achieve?

A diversified portfolio primarily aims to reduce overall investment risk. The concept of diversification involves spreading investments across various asset classes, sectors, or geographic regions. By doing so, the negative performance of one investment can potentially be offset by the positive performance of another. This helps to stabilize the returns of the portfolio and protects against significant losses that can occur when all investments are concentrated in a single area.

While maximizing returns through concentration may yield high gains in favorable conditions, it also exposes the investor to higher risk. Concentrated investments can lead to substantial losses if the market moves unfavorably for those specific investments. Decreasing transaction costs and increasing the average cost of investments are not main objectives of diversification; transaction costs relate more to how frequently an investor trades, and increasing costs goes against the principle of effective portfolio management, which typically aims to optimize returns while minimizing costs. Therefore, the primary goal of diversification is indeed to mitigate risk in an investment strategy.