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Diversification in investment management focuses primarily on reducing risk by spreading investments across various asset classes, sectors, and geographic regions. The underlying principle is that by investing in a diverse range of assets, an investor can mitigate the impact of poor performance in any single investment. For example, if one sector of the market experiences a downturn, the losses may be offset by gains in another sector, thereby stabilizing the overall portfolio's returns.

This strategy helps in achieving a balance between risk and reward, as it ensures that an investor is not overly dependent on the performance of a single investment or market. Risk reduction through diversification does not eliminate the possibility of loss, but it can lower the overall volatility of the investment portfolio, making it a fundamental principle of sound investment management.

Other options, such as increasing investment concentration or focusing solely on a single industry, contradict the essence of diversification, which is about spreading risk rather than concentrating it. The notion that diversification guarantees high returns is a misconception; while it can help in managing risk, it does not promise high returns.