Which of the following best describes the goal of risk reduction in investment diversification?

The goal of risk reduction in investment diversification is best described by the idea of protecting against significant losses by varying asset types. Diversification involves spreading investments across various assets—such as stocks, bonds, real estate, and commodities—to reduce the overall risk of an investment portfolio. By having a mix of different asset types, the negative performance of one or more investments can be offset by the positive performance of others, leading to more stable returns over time. This strategy is essential for managing risk because it minimizes the impact that any single investment can have on the total portfolio, thereby enhancing financial stability and reducing the likelihood of significant losses.

In contrast, increasing overall financial complexity doesn't align with the principle of risk reduction; instead, effective diversification aims for simplicity in execution and understanding. Maximizing returns on every investment is not realistic within the context of diversification, as the primary focus is on balancing risk rather than chasing maximum returns, which can lead to concentrated risk. Lastly, solely investing in safe assets won’t achieve effective diversification since it limits exposure to potentially higher-yielding investments, which can help offset risks. Therefore, the correct response emphasizes the protective aspect of asset variety within a diversified investment strategy.