CISI Professional Practice Exam 2026 – Complete Prep Guide

The primary goal of creating a diversified portfolio through asset allocation is to balance risk and return. This approach seeks to reduce the overall risk of the portfolio by spreading investments across various asset classes (such as stocks, bonds, and real estate) that typically behave differently under various market conditions. By diversifying, an investor aims to mitigate the potential negative impact of any single investment's poor performance on the entire portfolio. Thus, balancing risk and return helps investors achieve more stable overall performance, potentially leading to consistent growth over time while minimizing volatility.

In contrast, focusing on high-risk assets would increase overall portfolio risk, which is generally not aligned with the principles of diversification. Investing in a single industry limits exposure and increases vulnerability to sector-specific downturns. Lastly, maximizing capital gains may be an investor's goal, but without proper diversification, a portfolio could become excessively risky, potentially jeopardizing capital instead of preserving it over the long term.