Which of the following best describes the purpose of diversification in investment?

Diversification in investment is primarily about spreading risk across various assets. This strategy involves investing in a mix of different asset classes (such as stocks, bonds, real estate, and commodities) or different sectors within those asset classes. The rationale behind diversification is that by holding a variety of investments, the negative performance of one asset or sector can be offset by the positive performance of others, thereby reducing the overall risk of the investment portfolio.

For instance, if an investor holds only stocks in a single sector and that sector faces a downturn, the investor's portfolio could suffer significantly. However, if the same investor has a diversified portfolio that includes stocks from several sectors, bonds, and potentially other asset types, the impact of any single investment's poor performance is diminished. This reduction in risk helps promote more stable returns over time.

The other options do not align with the principles of diversification. Maximizing returns in one sector focuses on concentrated investments and increases risk, while limiting investments to high-performance stocks can lead to substantial losses if those stocks underperform. Targeting niche markets exclusively also involves a high degree of risk, as it doesn't provide the buffer that diversification offers against market volatility.